Ecommerce Podcast: How Russia’s everything company works with the Kremlin

Ecommerce Podcast: How Russia’s everything company works with the Kremlin

Ecommerce

Russia’s biggest technology company enjoys a level of dominance that is unparalleled by any one of its Western counterparts. Think Google mixed with equal parts Amazon, Spotify and Uber and you’re getting close to the sprawling empire that is Yandex—a single, mega-corporation with its hands in everything from search to ecommerce to driverless cars. 

But being the crown jewel of Russia’s silicon valley has its drawbacks. The country’s government sees the internet as contested territory amid ever-present tensions with US and other Western interests. As such, it wants influence over how Yandex uses its massive trove of data on Russian citizens. Foreign investors, meanwhile, are more interested in how that data can be turned into growth and profit. 

For the September/October issue of MIT Technology Review, Moscow-based journalist Evan Gershkovich explains how Yandex’s ability to walk a highwire between the Kremlin and Wall Street could potentially serve as a kind of template for Big Tech. This week on Deep Tech, he joins our editor-in-chief, Gideon Lichfield, to discuss how, in a world where the debates over regulating Big Tech are intensifying, this isn’t just a Russian story. 

Check out more episodes of Deep Tech here.

Show notes and links:

Full episode transcript:

Gideon Lichfield: Imagine a world where Google, Amazon, Spotify, and Uber are all one company. Everything from your morning news, music, and groceries, to your taxi home at night all delivered and operated by a single mega-corporation. Well, head over to Russia and you’ll find that world is very much a reality. 

Anchor for Bloomberg News: If you thought LinkedIn was hot, wait until you get a load of Yandex. The Russian search engine company raised $1.3 billion in an IPO yesterday here in the United States on NASDAQ. And at $25 the stock is valued twice as high on a price-to-earning basis as Google.

Anchor for Bloomberg News: What is the big attraction about Yandex? Why are investors so enthusiastic about this?

Reporter for Bloomberg News: The answer is pretty simple. It’s just growth, growth, growth.

Gideon Lichfield: Yandex is the crown jewel of Russia’s Silicon Valley. It has its hands in everything from search to autonomous vehicles. It even got an extra boost from the coronavirus pandemic. Revenue for the company’s delivery apps grew 42% in the second quarter of this year. 

But that success comes at a price. Russia has long-viewed the internet as a battleground in its escalating tensions with the West. 

And some of Russia’s power-brokers think Yandex is under too much foreign influence. They want Russia to have ultimate control of the massive amounts of data that tech companies hold on Russian citizens.

That means Yandex periodically gets caught between the demands of the Kremlin and of the foreign investors who hold most of its stock. But as we’ll see today, in a world where the debates over how to regulate Big Tech are intensifying, this isn’t just the Russian story. 

Today, I’m talking to Evan Gershkovich, a journalist for the Moscow Times. He wrote a story in our latest issue—the techno-nationalism issue—about Yandex’s balancing act, and how it might be seen as a kind of template for tech companies in the rest of the world.

I’m Gideon Lichfield, editor-in-chief of MIT Technology Review, and this is Deep Tech. 

So Evan, when I lived in Moscow 15 years ago, people were already using Yandex Search and Yandex Maps and Yandex Translate, but it seems to have become way, way bigger since then. Can you give us a sense of how important it is? 

Evan Gershkovich: Yandex started expanding very much in the way that Google did over the years, starting from just a search engine to becoming a service that provided…or a company that provided a variety of different services. And now when you live in Moscow, 15 years later, So many services are connected to this company from ordering food to ride sharing services, to figuring out what movies you’re going to watch.

And this year during the coronavirus crisis when Moscow was under lockdown, Yandex really became this sort of all-encompassing company because people relied on its taxi service and people also used its food delivery services to ensure they weren’t going to the supermarket so much. So it really became this sort of dominant presence in our lives here.

Gideon Lichfield: How did Yandex get to be so totally dominant in, in a way that not even Google is in the West? How does it beat out the competition? 

Evan Gershkovich: What the company will tell you when you ask them this question is that it’s through this diversification. About 10 years ago, around 2012, 2013, the company decided to start diversifying way beyond just the search and the maps, like you had mentioned. If you look at, you know, their movie recommending service, or if you look at their website that they have where you can buy cars or Navigator, they all have a competitor in Russia. So they don’t dominate every single industry fully, but they are pretty much everywhere. And in this way, you just, you know, anything you try to do online in Russia, Yandex comes up as a very plausible tool that you would use.

Gideon Lichfield: There’s this phenomenon in China, where the government went out of its way to help local tech giants beat out foreign competition. And one of the big things there, of course, is that the local firms are willing to cooperate with surveillance and censorship in a way that Google isn’t, for example. But in Russia, Yandex didn’t really have that sort of help, did it? It just kind of grew by itself. 

Evan Gershkovich: Yeah, absolutely. For years the Kremlin and other state security services didn’t really pay attention to the internet all that much. They were, the authorities here and Russia, were quite slow to coming around to the idea that this was an area that they should pay attention to. And this could be paradoxical or sound odd to a Western audience, but for years, Russia’s internet was really the freest internet or.. one of the freest internets that there was in the world. So Yandex, which started in 97’ and grew in the early aughts and through the 2010s, at that point, really, it wasn’t touched. And so it was free to develop how it wanted to. 

Gideon Lichfield: And when did this mentality of the Kremlin start to change? When did they start to think that a company as powerful as Yandex was going to be a problem?

Evan Gershkovich: One of the first moments was in 2008 when Russia fought a five day war with Georgia. 

Anchor for CBS News: Columns of Russian tanks and troops rolled into the American-backed former soviet republic of Georgia today after a nighttime barrage of artillery fire and rockets. Georgia said it was trying to retake control of south Ossetia; the breakaway province on Russia’s border that’s policed by Russian peacekeepers. Claiming more than 10 of its soldiers were killed in the night attack, Moscow said it would retaliate. 

Evan Gershkovich: One of Yandex’s services is called Yandex News, it’s a sort of a news aggregator very similar to Google News. And at that point Russian media was much more diversified. There was many more independent and liberal outlets. And so Yandex’s aggregator was picking up liberal and independent media news about the war and putting it in its feed and that really upset the Kremlin, which wanted its viewpoint to be highlighted.

Several years later when the Arab Spring swept across the Middle East in 2011, and then protests kicked off in Moscow against Vladimir Putin’s rule in Russia a few months later, that also was really sort of this moment where the Kremlin saw the internet specifically as an arena that could be influential. Because all those protests in the Arab Spring and then in Moscow were organized through Facebook and similar social media tools.

Anchor for CBS News: There was more political unrest tonight throughout Russia. The largest crowds in two decades have come out to protest what they’re calling corruption by the government. 

Anchor for CBS News: Tens of thousands packed the streets of Moscow in the biggest Anti-government demonstrations the country has seen for 20 years. They shouted “Putin is a Thief” and “Russia without Putin.” 

Evan Gershkovich: The Kremlin realized what power that the internet actually could have. So in both the war three years earlier in 2008, and then in 2011 during these mass protests, it started to sort of realize that this was an arena that it would if not control, at least pay close attention to.

Gideon Lichfield: And what kind of pressure did it start to put on Yandex?

Evan Gershkovich: So one of the first moments of pressure that Yandex actually faced was a potential takeover by Kremlin-linked oligarch Alisher Usmanov. He lobbied for the Kremlin support on national security grounds to take over the company. And a year later, in 2009, Yandex handed Russia’s largest lender, the state owned Sberbank a so-called “golden share,” which allowed the bank to veto transactions involving more than a quarter of Yandex’s stock. And this was essentially meant to satisfy the Kremlin that if there were any transactions the authorities weren’t happy with, they would be able to step in and limit them. 

Gideon Lichfield: And what’s been going on in the years since then?

Evan Gershkovich: So for about a decade this sort of golden-share arrangement seemed to satisfy the Kremlin and interest in Yandex pretty much waxed and waned. It was sort of left to its own devices until the fall of 2018 when rumors surfaced that Sberbank was now hoping to buy a 30% stake in Yandex to protect it from so-called “potential trouble.” That morning in New York, when trading opened up // the company lost a billion dollars in market value over these worries.

Gideon Lichfield: Now How much leverage do you think Yandex has? It’s one of Russia’s biggest companies. It’s majority owned by foreign investors. And obviously if Russia clips its wings, its share price would take a huge hit. Does that matter, do you think, to the authorities?

Evan Gershkovich: To the authorities, it seems like, not so much. Often it makes these decisions out of purely, you know, their own interests. But when there were these rumors that we spoke about, about Sberbank buying a 30% share in Yandex, it really appeared to be that that was coming from the Kremlin saying, you know, we have to sort of rein in Yandex. 

And Yandex solved that with what seems to be a really neat solution. It took about a year, but they changed that golden-share, that veto power over major transactions into what they called the Public Interest Foundation. And this foundation has 11 seats on its board. Three belong to Yandex. And the other eight are divided up among influential business groups and state-affiliated universities. And this structure now has that veto power that used to be with Sberbank. 

Gideon Lichfield: It seems like the Kremlin’s policy towards Yandex varies a lot. Sometimes it’s really concerned about foreign influence. Sometimes it just sort of lets it go. Why is there this inconsistency? 

Evan Gershkovich: So we’ve been speaking so far about the Kremlin as this sort of single entity. But to understand power in Russia, you need to understand more than just the Kremlin. The authorities are actually made up of these various rival groups. And there’s a specific constituency that’s known in Russian as the siloviki. These are officials with ties to law enforcement. 

These are basically hardliners who are very protective of the regime and they aim to control all facets of society. Including the internet, which in recent years as conflict with the West has renewed, it’s become one of these arenas they very much wanted to control. And Yandex for its part as this major tech company  in Russia has gotten caught up in the middle of that process. 

 And this is something I actually talked about with Tatiana Stanovaya, who is the founder of Russian political analysis site R.Politik. From her perspective, she says that for the siloviki, the Yandex foundation was seen as a half-victory. 

Tatiana Stanovaya: 

после очень долгих переговоров пришли к идее создания этого фонда общественных интересов. это полу решение. В чем его смысл. смысл в том что с одной стороны были силовики которые считали что яндекс должен стать российской компартии. волож должен уйти и вообще должна быть смена собственников и компания должна быть зарегистрирована в россии и вести свою деятельность операционную в россии. И здесь должны быть ее основные интересы. 

и с другой стороны есть либералы они считали что такое решение Что предлагают силовики будет катастрофой для российского рынка. поэтому было принято соломонов решение. скажем чтобы компания не досталась ни тем ни другим. вот этот фонд общественных интересов это фактически буфер.
Tate Ryan-Mosley: After very lengthy negotiations they settled on the idea of a public interest foundation. It’s a half-measure. The logic behind it… was that, on one hand,… there were the siloviki, who thought Yandex should become a Russian company. Volozh , the CEO, should quit, there should be a change of ownership, and the company should be registered in Russia and carry out all its operations in Russia, and its main interests should all be here.

Tate Ryan-Mosley: And on the other hand you have the liberals in the government. They thought that the solution the siloviki proposed would be catastrophic for the Russian markets. So there was a compromise that neither group would get its way with the company. This public interest foundation is basically a buffer. 

Evan Gershkovich: Tatiana says that the Public Interest Foundation has three main functions. The first is to block deals that would concentrate more than 10% of Yandex’s stock under a single owner. The second is to control operations involving intellectual property. And third, and this is another sensitive subject for the siloviki involves control of personal data.

Tatiana Stanovaya: 

вот в таком виде фонд должен был в какой то степени снять опасения силовиков. но для самих силовиков это не является решением проблемы. для них это скорее является вынужденной уступкой. то есть яндекс не стал российской компанией и на сегодня вопрос снят но не факт что проблема не встанет завтра. и я думаю что в силовой части российской элиты может быть не сегодня но в ближайшие годы найдут повод пересмотреть эту схему. Посмотрим.  Tate Ryan-Mosley: So in this way, the foundation was supposed to somewhat mitigate the worries of the siloviki. But to them it’s not a solution to the problem. To them it’s more like a forced surrender… Meaning, Yandex has not become a Russian company, and for today the question is off the table, but that doesn’t mean it couldn’t come up tomorrow. And I think that the security establishment of the Russian elite could find a pretext, maybe not now but in the next few years, to revise this arrangement. We’ll see.

Gideon Lichfield: So where we are today is that Russia is talking about much tighter constraints on the internet. Talk to us a bit about what’s been happening there.

Evan Gershkovich: So in recent years, Russia has passed two key laws that have affected internet companies. The first one requires them to store data on servers in Russia and not anywhere abroad. And the second law is this notorious, so-called Sovereign Internet Law. This means that a state owned communications infrastructure would be created, that would allow the country to cut itself off from the global internet. What this means is that there would be a sort of a bubble of sorts of Russian own services that would create an internet that would only be Russian. And from the Kremlin’s perspective, what it sees through the sovereign internet would be a way to control what its citizens can see online. 

Gideon Lichfield: So it sounds like Russia is going for something much closer to China’s model of the internet, where tech platforms can really only operate if they’re friendly to the government? 

Evan Gershkovich: Yes and no simultaneously. So yes, in that it’s attempting to, but one of the main things in recent years has been the fact that a lot of these ventures haven’t really succeeded. 

One of the key moments in the past few years was when Russia tried to block a popular messenger app here called Telegram. And for about a year, it stated that that app was blocked. All the while, authorities kept using it themselves, including state media channels and even the Kremlin spokesman Dmitri Peskov used it himself to communicate with foreign journalists.

So it became the sort of farcical, absurdist thing where the country said this technological service was blocked—but it wasn’t able to block it. And a year and a half later, it just announced “you know what? It’s no longer blocked.” So with the sovereign internet it does remain to be seen whether this is something that Russia is actually able to pull off. And so while it may want to be China in this sort of way, it sometimes falls short.

Gideon Lichfield: What would it mean for a company like Yandex if the Sovereign Internet Law really goes fully into effect?

Evan Gershkovich: It would be massive. Yandex has been hoping to expand its business beyond Russia’s borders for a long time. It hasn’t been incredibly successful at that, but there are some ways that it’s been you know, reaching out beyond Russia recently. Its driverless car program has been piloted in Detroit and in Las Vegas and in Israel. The more Russia tries to cut off from the global internet, the more that would hamper a company like Yandex—which is hoping to be not just Russian, but global.

Gideon Lichfield: So this at one level seems like a very specifically Russian story. There’s this big company. It dominates practically every area of its industry. It’s in this cozy, but tense relationship with the Kremlin. It’s had to make some concessions. And yet at the end of your piece, you argue that this relationship with the government is something that Western tech companies might have to start emulating.

Evan Gershkovich: Right. Even, you know, companies like Google and Facebook have started coming under pressure namely for what’s seen as their opaque content moderation processes. And this year, Facebook, in response to that, created this so-called oversight board. It’s similar to how Yandex’s Public Interest Foundation has universities and big companies that are part of it. Facebook’s oversight board has legal and human rights luminaries who are able to review and overturn some of the platform’s decisions.

So this is sort of like a small scale version of what Yandex’s Public Interest Foundation is. And it may sort of foretell you know not just the sorts of demands that a company like Google and Facebook may face going forward, but the solutions that they might come up with to retain some sort of independence in the way that Yandex has here in Russia. 

Gideon Lichfield: That’s it for this episode of Deep Tech. This is a podcast just for subscribers of MIT Technology Review, to bring alive the issues our journalists are thinking and writing about.

You’ll find Evan Gershkovich’s article “Yandex’s balancing act” in the September issue of the magazine.

Before we go, I want to quickly tell you about EmTech MIT, which runs from October 19th through the 22nd. It’s our flagship annual conference on the most exciting trends in emerging technology. 

This year, it’s all about how we can build technology that meets the biggest challenges facing humanity, from climate change and racial inequality to pandemics and cybercrime. 

Our speakers include the CEOs of Salesforce and Alphabet X, the CTOs of Facebook and Twitter, the head of cybersecurity at the National Security Agency, the head of vaccine research at Eli Lilly, and many others. And because of the pandemic, it’s an online event, which means it’s both much cheaper than in previous years and much, much easier to get to.

You can find out more and reserve your spot by visiting EmTechMIT.com – that’s E-M…T-E-C-H…M-I-T dot com – and use the code DeepTech50 for $50 off your ticket. Again, that’s EmTechMIT.com with the discount code DeepTech50. 

Deep Tech is written and produced by Anthony Green and edited by Jennifer Strong and Michael Reilly. I’m Gideon Lichfield. Thanks for listening.

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