Ukraine War: How Russia is destroying its tech industry

Russia’s war against Ukraine is accelerating the decline of an already ailing industry. Past success stories? slowed down Example: Yandex.

Seven days after Russia invaded Ukraine, Vladimir Belugin packed up his family’s belongings, canceled the lease on the apartment in Moscow, took his children out of kindergarten, and started a new life away from home. A little later, he also resigned from his position as Chief Commercial Officer for small and medium-sized companies at Yandex, the Russian equivalent of Google. The company is considered the most important tech company in the country.

The war means that everything will change in Russia, both for him and for his company, Belugin said from his new home in Cyprus: “You have to accept these new rules because in the end there are no rules at all in Russia.”

Belugin was far from the only tech employee to leave the country. In the months following the invasion, Russia experienced a mass exodus of IT professionals. According to the government, around 100,000 digital specialists left Russia in 2022, which is about 10 percent of the workforce in the technical field – a number that was probably calculated on the small side. In parallel with these departures, more than 1,000 foreign companies restricted their operations in Russia, in part due to what are arguably the most sweeping sanctions ever imposed on a major economy.

More than a year has passed since the start of the Ukraine war. More than 8,300 civilian deaths were counted. The tech workers, who left everything behind to flee Russia, warning that the country is on the way to becoming something of a village: cut off from the global tech industry, from research, from funding, from the scientific exchange and important technical components. Meanwhile, Yandex, one of the country’s biggest digital successes, has begun to unravel and is selling lucrative businesses to VKontakte (UK), a competitor controlled by state-owned companies.

“My country is being stolen”

“I felt like my country was stolen from me,” says Igor, a senior executive at VK, who still has family in Russia and asked to change his name so he could speak openly. When the war started, he says, he felt like 20 years of Russia’s future were taken away from him in one fell swoop.

In the country, the tech sector was previously one of the few areas where people felt they could succeed because of their skills and not just their connections. There was also a spirit of openness in the industry: Russian entrepreneurs attracted international funding and did business around the world. For a time, even the Kremlin seemed to welcome this openness, inviting international companies to invest in Russia.

But long before the war, cracks began to appear in the Russian technology sector. For more than a decade, the government has sought to rein in Russia’s internet and its most powerful tech companies — threatening an industry that once promised to lead the country into the future. Experts who were able to speak to MIT Technology Review say Russia’s war in Ukraine has only accelerated the damage already done. The country’s largest tech companies have been pushed further into isolation and chaos. Citizens, in turn, have been locked into the tightly controlled home internet, where news comes from official government sources and freedom of expression is severely curtailed.

“The Russian leadership has chosen a completely different path of developing the country,” says Ruben Enikolopov, assistant professor at the Barcelona School of Economics and former rector of Russia’s New Economic School. Isolation became a strategic decision, he says.

The tech industry in Russia

Although the technology industry is not the largest in Russia, it is one of the most important drivers of the economy, according to Enikolopov. Between 2015 and 2021, the IT sector in Russia was responsible for more than a third of GDP growth, reaching 3.7 trillion rubles ($47.8 billion) in 2021. Although this accounted for just 3.2 percent of the total GDP, Enikolopov believes Russia’s economy will stagnate if the tech industry lags behind. “I think this is probably one of the biggest blows to future economic growth in Russia.”

On February 24, 2022, the day the Russian invasion of Ukraine began, the atmosphere in the Yandex office in southern Moscow, clad in red bricks and glass, was tense. Anastasiia Diuzharden, then head of content marketing at Yandex Business, was there — along with a number of other employees — but says looking back, she saw few people working. There were five times as many people in the building’s smoking area as usual. Some employees left the country that same day.

As news of the invasion spread around the office, Diuzharden, and her colleagues were called to a “khural,” a weekly meeting. There, she says, Tigran Khudaverdyan, executive director and deputy CEO of Yandex, reassured them that the company would move on.

Look at Yandex

Yandex is a company that was proud of in Russia. It operated worldwide, with part of the company registered in the Netherlands. Engineers successfully competed with American companies: Yandex had captured a larger share of the Russian search market than Google, offering a suite of 90 services that dominated much of Russia’s digital world. These included the lucrative content platform “Zen” and the news aggregation platform Yandex News, which many Russians use to start their day on the internet. But it was precisely these information offerings that were also the cause of the company’s problems.

Greed for news

In the weeks following Russia’s invasion of Ukraine, Yandex News was visited by a record 14 million people a day. But instead of reading about the deaths of Ukrainian civilians and the destruction of their villages and towns, users heard that the Russian liberators were only “denazifying” Ukraine. About 70 percent of the information on Yandex News came from state-controlled media sources that spread propaganda — the result of decades of state crackdowns on independent Russian media, including new laws on “permissible media sources” after the invasion.

Diuzharden knew the company had to play it safe to survive. “If Yandex makes any [anti-war] statements, it could mean the end of the company,” she says. But the concession had its price. Three weeks after the invasion, Yandex Executive Director Khudaverdyan was sanctioned by the EU for withholding information about the war from the public. He resigned from his post. Four days later, trading in Yandex shares on the US technology exchange NASDAQ was suspended.

Then, in June, Arkady Volozh, the company’s Israel-based CEO, was also placed on the sanctions list and resigned. He assured employees that the company had prepared emergency funds for them. “We always knew which country we lived in,” Diuzharden recalls his words. Former employees estimate that a third of Yandex employees left the country in the first two months after the invasion (although many continue to work for the company as telecommuters). Diuzharden, who has family in Ukraine, eventually left Russia in June. On her last day in the country, in the office overlooking the Moscow River, she estimated that only about 10 percent of the usual staff were present.

In the course of these changes, Yandex finally sought a plan for how to proceed. It was agreed to divest its news and content platforms by selling them to VK. In return, Yandex acquired its grocery delivery service from VK. The deal closed in September.

The growing influence of the government

Then, nine months after the start of the invasion, Yandex announced that it would no longer exist in its original form. By the summer, the company will be split into two parts: a Russian component and another owned by the former parent company, which is headquartered in the Netherlands. The Russian part, which will retain control of the company’s core businesses, is to be taken over by a special management partnership made up of three Yandex executives and economist Alexei Kudrin, who is close to Putin.

Yandex’s long-term prospects are bleak, say former employees. Inside Russia, the once progressive company will still have to work with the government. Outside the country, the company is struggling to advance its business. “I think there is no future,” says ex-employee Belugin. Yandex does not want to comment on this issue. The company told MIT Technology Review that despite a difficult year, it has increased its headcount and “exceeded” its revenue targets for 2022. Yandex also stated that it is working on expanding its international business.

Yandex is just the latest in a long history of attempts by the Kremlin to seize control of Russia’s tech industry, fearing that the public’s unrestricted access to online information could create problems for the government. Parts of that effort date back to 2011, when Facebook and Twitter helped spark what is arguably the largest anti-government protest in the country since the 1990s.

Some in the tech industry joined the protests in hopes of moving Russia down a more liberal, democratic path. Tech worker Igor says he was one of them. But after a few years, he gave up the protests. “It felt hopeless,” he says. In the years that followed, Russia introduced increasingly restrictive laws, arresting social media users for their posts, demanding access to user data, and introducing content filtering. This has put pressure on Western social platforms like Facebook, Instagram, Twitter, and LinkedIn (which has been blocked in Russia since 2016) as well as their domestic counterparts.

VKontakte, often referred to as Russia’s Facebook, was “de facto nationalized” after its founder, Pavel Durov, was ousted from the company in 2014 and oligarchs close to the Kremlin took control, Enikolopov says. After fleeing the country, Durov, who later founded the popular messaging app Telegram, described Russia as “incompatible with internet business”. According to a study by the National Research University Higher School of Economics, founders of “unicorn” start-ups – i.e. those with a valuation of more than a billion dollars – leave no country more often than Russia.

The Russian government thought it had to control everything, says Enikolopov: “You couldn’t leave the tech companies alone.” After the annexation of Crimea in 2014, the first international sanctions against Russia were imposed. The Kremlin, therefore, began promoting the idea of ​​Russia’s own sovereign Internet, the RuNet. The war against Ukraine and the resulting even stronger sanctions have breathed new life into the concept. In March 2022, the Kremlin first blocked access to foreign social media platforms such as Instagram, Facebook, and Twitter, a measure that helped keep Russians in a controlled information bubble.

Russian social media platforms

The country is also working to replace popular international websites with domestic versions. In order to subvert Google Play and Apple App Store, VK has established a domestic app store called RuStore together with the Ministry of Digital Development. TikTok, Instagram and YouTube got local clones like Yappy, Rossgram and RuTube. According to tech worker Igor, in the future Yandex News will help consolidate state control over the content that Russian users can read and eventually merge with other VK news products.

“The main focus of VK is spreading propaganda,” says Igor, adding that this goal is achieved by drawing Russian users’ attention to Russian services. (VK did not respond to a request for comment.) Controlling online content is not the only means by which Russia seeks to exercise its digital sovereignty. After imposing sanctions last year, the state has begun touting the goal of building a complete, self-contained tech ecosystem that includes all services from financing to hardware and supply chains.

The government wants to support the tech industry

The Russian government has promised “unprecedented funding” for the tech industry, which is expected to total more than 3.19 trillion rubles ($41.2 billion) by 2030. But building up the sector will be a difficult race to catch up: Even according to government estimates, the Russian chip industry is 10 to 15 years behind the rest of the world. Before the sanctions, Russia imported about $19 billion worth of high-tech goods annually, with most of those imports (66 percent) coming from the EU and the US, according to Brussels think tank Bruegel. Experts like the Bank of Finland’s Heli Simola estimate that imports of technology goods have fallen by 30 percent since last year.

“In many ways, Russia is not a particularly developed economy, which means that there are not many high-tech industries,” agrees Niclas Poitiers, a research associate at Bruegel. “In many sectors, industrial production has fallen sharply.”

Due to trade restrictions, Russia has also lost direct access to products from many leading companies, including Cisco, SAP, Oracle, IBM, TSMC, Nokia, Ericsson, and Samsung. Poitiers says Russia’s attempt to build tech companies on its own without conventional international exchanges feels like a throwback to Soviet times. Today’s Russia, therefore, relies more on-chip on smuggling via third countries and partners such as China. “The knowledge is no longer available. There is no human capital,” he says.

Long before the invasion of Ukraine, the Russian government was trying to strengthen its tech ecosystem with special projects. One of these was “Rosnano,” a state-owned nanotechnology company that the government is now considering winding up. The most significant project in this series, however, was “Skolkovo”, a kind of high-tech center that would become a Russian Silicon Valley.

Once close connections

Even in normal times, such ventures have faced difficulties, says Adrien Henni, venture capitalist and co-founder of the East-West Digital News website. “There have been some commendable efforts,” says Henni. “But these things have been hampered by corruption and inefficiency – and, more broadly, by the fact that the regime as a whole has stopped caring.”

Skolkovo, which opened in 2010, was part of a modernization program initiated by then-President Dmitry Medvedev, who once presented himself as a young, digitally-savvy, and Western-leaning technocrat. Located in southwest Moscow, less than 30 minutes drive from the Kremlin, Skolkovo town looks like a swanky technology park somewhere in the world. The dream envisaged it becoming a launch pad for Russia’s tech entrepreneurs in need of grants, educated staff and office space.

There was a steep learning curve. “The word ‘startup’ didn’t even exist in the Russian language,” says Alexey Sitnikov, vice president for communications and development at the project’s associated university, the Skolkovo Institute of Science and Technology, known as Skoltech.

However, some Western tech executives and venture capitalists heeded the call. Managers from Google, Intel, Nokia, and Siemens joined Skolkovo’s advisory boards and boards. MIT signed a cooperation agreement to support Skoltech, which caused controversy and even drew the attention of the FBI. (MIT ended its relationship with Skoltech in February 2022 after the start of the Ukraine war.)

At Medvedev’s side was once Ilya Ponomarev, an opposition member in the State Duma and adviser to the President of the Skolkovo Foundation, Viktor Vekselberg. His job was to promote the establishment of technology parks across the country. “Skolkovo was the evolution of that idea, the crown jewel in this network,” says Ponomarev.

Ponomarev did not stay long. In 2011, a year after the project was launched, he became one of the leaders of anti-government protests in Russia and was soon accused of embezzling funds to Skolkovo. Four years later, after becoming the only State Duma deputy to vote against the annexation of Crimea, he was charged with embezzlement. Ponomarev’s bank accounts were blocked and he was stranded in the US, from where he was no longer allowed to travel to Russia. He claims the charges are politically motivated. In 2019 he took Ukrainian citizenship and is now calling on the Russians to overthrow Putin – by force if necessary. The work he and his colleagues did in Skolkovo and in wider Russian entrepreneurship is “in vain”.

“Anything related to entrepreneurship and venture capital requires a high level of international cooperation and participation. And you can’t limit that to one country. That’s exactly what happened in Russia,” he says.

Skolkovo was still home to a growing number of successful Russian start-ups. But after the start of the war, many international employees left the technology park. More importantly, foreign venture capital stays away. In 2022, venture capital investments in Russian companies fell by 57 percent to $1.1 billion.

An uncertain return

Medvedev announced in December that Skolkovo would reorganize its activities in the face of the challenges posed by the sanctions. The project is now helping to distribute part of the state funds that are intended to bring Russia’s technology sector to independence. In February, the Skolkovo project was then subject to US sanctions. Sitnikov and other leaders of Russia’s tech clusters, such as Irina Travina, the CEO of Novosibirsk-based IT association SibAcademSoft, now believe that by cooperating with other markets outside the NATO sphere, e.g. B. in Asia, Latin America, and the Middle East, will continue to thrive in Russia.

Es ist jedoch schwer vorherzusagen, was die Zukunft für den russischen Technologiesektor bereithält. Seit Beginn des Krieges hat das Land eine Welle von Fusionen und Übernahmen erlebt, da ausländische Unternehmen sich beeilten, aus dem Markt auszusteigen. Oft werden Vermögenswerte zu niedrigen Preisen an russische Konkurrenten verkauft. Ein solcher Vermögenswert war etwa Avito, die beliebteste Kleinanzeigenseite in Russland und mittlerweile die größte der Welt: Im Oktober verkaufte eine Tochtergesellschaft des südafrikanischen Unternehmens Naspers sie für 2,46 Milliarden Dollar, einen Bruchteil ihres geschätzten Werts von 6 Milliarden Dollar, um Russland zu verlassen. Die gleiche Tochtergesellschaft hat auch ihren Anteil an VKontakte verkauft. Diese Verkäufe könnten dem Kreml noch mehr Kontrolle über den Technologiesektor verschaffen.

The Russian economy performed better than expected in 2022, with some tech companies, including Yandex, benefiting from the departure of their peers. But many of the economists, tech entrepreneurs, and IT pros we spoke to believe this phase may be short-lived. There is no end in sight to Russia’s military engagement in Ukraine. Three-quarters of Russians still support the war, at least according to polls.

One concern is that there may not be enough Russian users to sustain the country’s current digital industry. Another concern is that many skilled workers have migrated to other countries in the region, including Kazakhstan, Georgia, Armenia, and Turkey.

A country without Putin?

Russia’s policy hopes to persuade these workers to return. In November, a billboard in New York Times Square showed an airplane flying through a bright blue sky and a message in Russian: “It’s time to go home!”

The ad was an invitation to IT professionals to visit the Alabuga Special Economic Zone in the Russian Republic of Tatarstan. But for now, the experts don’t seem to be returning. Even before the war, Russia was struggling with a shortage of domestic talent. A Gartner report published in late 2021, before the war, said the shortage of skilled digital professionals could increase by 50 percent to as many as one million people by 2025.

Despite the looming skills shortage, in September the Russian government announced cuts to a 21.5 billion ruble ($277.2 million) subsidy program designed to support the tech industry and keep IT professionals in Russia. Several high-profile figures have renounced their Russian citizenship since the war, including billionaire tech investor Yuri Milner and Oleg Tinkov, founder of online bank Tinkoff. However, many others have remained silent, afraid of the possible consequences of speaking out.

Yandex employee Diuzharden now lives in Belgrade, Serbia, a country where many Russian IT workers have relocated thanks to favorable visa conditions. She is unsure when she will be able to visit her hometown of Magdan in northeastern Russia, an eight-hour flight from Moscow. Many of her friends who left the country want to come back, she says. “I’m ready to come back to Russia, but only under certain conditions. I don’t want to live in a country where Putin is the president. I don’t want to live in a country that starts wars.”


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