MOSCOW BLOG: Nationalising Russia’s internet

MOSCOW BLOG: Nationalising Russia’s internet
Russia is going through a M&A bonanza brought on by the Western sanctions, but the state is using the opportunity to increase its control over the internet. / bne IntelliNews
By Ben Aris in Berlin August 23, 2022

Since the sanctions came down on Russia there has been a bonanza of M&A activity as those companies and oligarchs that have been included in the lists have had to dump their subsidiaries to protect them from being targeted. Often this means that individuals find themselves on a list, but their company is excluded as it is too important, so they have to sell out.

This is what happened to Leonid Fedun, who is the number two at oil major Lukoil and is on the list, but his company is not. He also owned the legendary Spartak FC, so, conveniently, the oil company bought the club and a top Moscow stadium for “PR purposes”. The disruptions are so great that there are some real bargains on offer and market shares are being shifted around dramatically.

Yandex, the “Google of Russia”, is another one that has found its bosses on the lists but the company itself is still not. It has just sold its leading Yandex.News to rival, VK, “the Facebook of Russia”.

Formerly the most valuable internet company not only in Russia, but all of Europe, Yandex has been accused of filtering its news to promote the war in Ukraine. In its defence the company says that it is now illegal to publish news from any but government approved news sources and they are overwhelmingly pro-war, so it had no choice.

VK has been a big winner from all this, as while Yandex has been cautious and cutting costs – it just reported excellent results yesterday and did much better than its rival on the back of a flood of adverts due to the sanctions – VK is on a tear and snapping up a raft of assets.

The company has had a sharp change in fortune since its shareholders changed in December 2021 and Vladimir Kiriyenko, the son of former Prime Minister Sergei Kiriyenko and now a key Kremlin insider, took over.

VK has been consolidating its position in the Russian market and is set to emerge from this crisis as Russia’s top internet company, even as its competitors suffer from a dramatic tech crisis which has seen industry professionals flee en masse and foreign investors ditch positions in Russian companies.

Banking giant Sber is maybe the biggest loser from all these changes. It dropped the word “bank” from its old name of Sberbank, as it aspired to become a sort of lifestyle portal that also looks after your money and has invested into everything, etc. But now as a sanctioned entity it has been dumping a whole bunch of online businesses and been forced to give up its ambitions. VK has been buying some of its assets too.

VK has been in effect taken over by the state, which explains why it has not put the brakes on its investment and acquisition plans. One of the side-effects of all this M&A is the Kremlin will gain a lot more control over the internet, which has largely been a privately owned affair until now.

What’s going on now reminds me of the de facto renationalisation of the oil sector shortly after Russian President Vladimir Putin took over in 2000. In the 1990s the oligarchs “privatised” the oil sector, which unusually for an oil-rich nation ended up largely in private hands. However, the Yukos case in particular created the state-owned Rosneft and in effect nationalised a large part of Russia’s oil sector.

Now the same sort of backdoor nationalisation via market mechanisms seems to be going on again – but this time it’s the internet that is being nationalised. It is a much more subtle process than flat out nationalisation, as it is done using market methods. Also, like the oil sector, lots of companies remain in private hands, such as Lukoil, but they need to be careful, as it is clear if you step a foot out of line you can lose your business.

This is a hybrid system Russian President Vladimir Putin has been building for years that we dubbed ZAO Kremlin: the most important assets in a sector remain in the state’s hands but usually a second state-owned rival is set up to directly compete with it and keep it sharp, while there is another tier of wholly privately owned companies to create a real market place with all the benefits that competition brings.

Yandex remains nominally private, but it is remaking its business to reflect the new, more restricted space it has to operate in. News has become a minefield of a business in Russia and not only was Yandex happy to be shot of it, the state must be just as pleased to buy it. In return Yandex gets food delivery service Delivery Club, which is a nice problem-free e-commerce business.

You could argue that Yandex was foolhardy to get into the news business in the first place. A similar thing happened in TV too, where the STS broadcaster is the only privately owned and listed TV company, but which told me years ago that they avoided doing news at all, as it “causes too many problems”. All the TV stations that carry news are all state-owned, but the state has long wanted to retake control of the internet and sanctions have provided the means to grab big swathes of it without causing too much of a fuss.

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