When the Kremlin wanted to compete with the West economically and in the contest for skilled workers more than a decade ago, its well-educated officials helped nurture homegrown answers to Google, Facebook and tech-security companies such as Symantec.
The top Russian search engine, Yandex, sold shares on Nasdaq. The big social network VKontakte got a major investment from an oligarch’s company as that firm sold stock, and the antivirus maker Kaspersky Lab expanded rapidly in other countries to become one of the best-known Russian exports.
But the very success of those companies unnerved top bureaucrats, who worried that such thriving Internet businesses would allow a new generation of Russians to glean uncensored information from around the world and to organize political movements beyond the government’s control.
The resulting onslaught of laws, regulations and back-channel demands that the Kremlin imposed has reduced those once-promising tech giants to shadows of what they could have been — while wrecking what the companies’ founders had hoped would be hedges against government domination.
“This has been a total disaster for the Russian economy, and the tech industry was adding a lot of value,” said Esther Dyson, an American and early investor in Yandex who left the search engine’s board shortly after Russia invaded Ukraine. “Even before they started waging war on Ukraine, they were waging war on the truth.”
Russian-language Yandex, which draws 4 billion visits a month and remains the most visited website in Russia, is the clearest example of Russian tech’s downfall. The majority of its stock is held by Western or global institutions and its headquarters is in the Netherlands, but neither fact has been enough to keep it from having to bend to Kremlin demands that it block search results for opposition leader Alexei Navalny or censor news about the war in Ukraine.
Yandex’s slow collapse, detailed here for the first time, shows how even the most advanced companies couldn’t be safe with their core operations in Russia, underscoring why entrepreneurs and investors predict that it will be years, if not decades, before they’ll be willing to reengage there again.
“Even if the stock is elsewhere, even if they have a foreign board of directors, it does nothing,” said Ilya Ponomarev, a well-connected Russian technology entrepreneur and investor who fled to Ukraine in 2014 after casting the lone vote in Russia’s lower house against the annexation of Ukraine’s Crimean Peninsula. “They cannot escape, because they are irrevocably linked to a Russian audience.”
Yandex was founded by Arkady Volozh, who is its chief executive, and the late Ilya Segalovich, who was its chief technology officer. The company’s name is a contraction of “Yet Another Index.” Both founders admired the success of Yahoo.
When the company sold shares on Nasdaq in 2011, Yandex’s executives knew the Russian government would be sensitive about control slipping across its borders. So the founders kept shares with a majority of the vote, and Yandex issued one special share, held for years by a government bank, that could veto any one shareholder’s amassing more than 25% of the regular stock.
Still, Yandex executives found themselves bargaining directly with regulators and overseers in the office of President Vladimir Putin, arguing that publicly traded stock was the key to retaining talent that would otherwise move abroad and that excessive restrictions would drive users to Western competitors, according to participants and those advised of the talks as they happened.
“The industry was doing well,” Dyson recalls of those years.
Privately, the executives hoped that the logic they presented would get them real freedom to operate, and for many years, it seemed that it did. But as the companies grew more important, Kremlin officials supported laws banning sites, directing others not to link to those sites and, in 2017, requiring that any media carried by major aggregation sites, including Yandex’s, be licensed by the Russian government.
Some companies paid an earlier price for becoming important. The early victims included VKontakte, Russia’s biggest social networking site, which operates much like Facebook. From humble beginnings among university students, VKontakte grew with general Internet use in Russia and became the most popular social site in 2008.
The Russian-government-friendly Internet conglomerate Mail.ru took an early stake and in turn sold a minority stake of itself to the public in London in 2010. Mail.ru was controlled by billionaire oligarch Alisher Usmanov, who was sanctioned this year by the United States. But VKontakte founder Pavel Durov held voting control until 2014, when he sold shares to a Mail.ru ally.
Months later, he was forced out of the company. In a post on his VKontakte account, Durov said the FSB, Russia’s federal security agency, forced him to sell after he refused to turn over personal information on members of a group supporting Ukrainian protests against Russian-allied President Viktor Yanukovych before his 2014 resignation.
The Kremlin won more direct control of VKontakte this past December when voting control went to affiliates of the state-controlled energy company Gazprom. After the passage of a law in March allowing sentences of up to 15 years in prison for describing Russia’s actions in Ukraine as a war, the site now heavily censors posts about the invasion.
Kaspersky Lab, the security firm that became one of the most globally recognized Russian technology companies, had planned to go public but dropped the idea in 2012. Instead, it pursued a major business expansion in other countries, giving it brand recognition and an argument that it should not do anything that cost it trust in the United States and elsewhere, employees said.
But that was less leverage than it needed when laws required tech companies to hand over data to the government on demand.
Consumer security software typically has a great deal of power to act inside customer machines, and U.S. officials had been concerned for years that Kaspersky was seeking sensitive U.S. documents. In 2017, the Department of Homeland Security ordered federal agencies to remove Kaspersky software from their networks. That same year, Kaspersky admitted that its antivirus software had uploaded classified information from a U.S. intelligence worker’s home computer, although the company said it soon destroyed the information.
But Russian intelligence agencies had already made clear who was in charge when they charged Kaspersky cybercrime investigator Ruslan Stoyanov with treason in 2016 after he shared information with U.S. authorities. The details of the case were sealed, but Russian media said it involved his work in years previous against an accused cybercriminal who had been pursued and convicted by Russian authorities before he was released and turned the tables on those who had hounded him. Convicted, Stoyanov remains in prison.
A Kaspersky rival in Russian cybersecurity fared even worse. Years after moving his headquarters to Singapore and ahead of an anticipated IPO, Group-IB chief executive llya Sachkov was arrested last September while in Moscow and charged with treason, accused of passing secrets to the West. He has denied the accusations but remains in pre-trial detention.
Companies that moved away earlier and more definitively fared better. The programming shop Luxoft, for one, was spun off from a Moscow tech company and listed shares on the New York Stock Exchange. After the 2014 invasion of Crimea, it moved most of its operations out of Russia, and another tech services firm bought it for $2 billion in 2019.
Today’s Yandex was a foregone conclusion after 2019, employees said, when a proposed law would have barred majority foreign ownership of big Russian tech companies.
On top of a number of previous laws, the Kremlin wielded the idea that no company designated as a “strategic information resource” could be mostly owned by foreign investors.
Knowing that could put Yandex out of business, the company’s executives negotiated directly with top officials.
A special committee of the board, meanwhile, explored alternatives that might stop an effective government takeover while acting in the best interest of the shareholders, as required under U.S. law. It sent the executives back to the government offices again and again to see what the Kremlin might accept.
“The special committee supervised the process, i.e., came up with, and authorized, possible solutions, but had no direct interaction with the Kremlin,” said someone then at Yandex who was briefed on the internal debate and spoke on the condition of anonymity to discuss sensitive dealings with the government.
The possibilities included moving the headquarters back to Russia, selling to another Russian company, spinning off Russian operations, delisting from Nasdaq, going private, and creating a new class of super-voting shares just for Russians, according to a later Securities and Exchange Commission filing.
In the end, the best Yandex could do was to endow the special share owned by Sberbank with greater power and give it to a new foundation with a majority of directors from government-allied universities and business groups.
“There was a certainty they would ultimately answer to someone else,” the person said. “We had bought shareholders a number of years, and then we did what we had to do.” After that, the proposed law was dropped.
A current employee said the special share carried more weight than most people realized.
“Technically, it’s an emergency button,” the person said. “But it’s above your head. You can’t do significant decisions.” The Kremlin’s information regulator did not respond to an email seeking comment.
The toll on Yandex is accelerating, current employees told The Post.
Yandex now must block access to more and more sites as they are banned by the government.
And its news aggregation site, the country’s most popular, carries fewer than a third of the outlets it offered before the law that required all of them to be licensed.
Lev Gershenzon, a former head of Yandex’s news section who now lives in Germany, posted publicly six days after the invasion that his old company was now a part of the problem.
“The fact that a significant part of the population of Russia may believe that there is no war is the basis and driving force of this war. Yandex today is a key element in hiding information about the war.
“Every day and hour of such ‘news’ is human lives. And you, my former colleagues, are also responsible for this,” he wrote. “It’s not too late to stop being partners in a terrible crime. If you can’t do anything, quit.”
Yandex itself is now trying to quit the news business. Last month, it publicly announced that it was looking for buyers. The company did not respond to a request for comment.
For Yandex, the use of public markets as a hedge worked until it didn’t. In the past five months, its Nasdaq shares have lost as much as two-thirds of their value.