Russian tech: Western financing gone

As the largest telecom market in Eastern Europe, Russia has long seemed like an attractive environment for digital goods and services. This is especially true when considering the strong local demand for telecom products. However, economic sanctions, a state strategy of digital isolationism and the mass exodus of Western financing are pushing the country towards greater technological autonomy, which is improving domestic innovation but lessening its appeal to many foreign businesses. While a number of Russian start-ups saw strong Western financing in 2013, in 2014 this option has dissapeared altogether for emerging digital firms. Both Silicon Valley and London corporate finance are unlikely to return to the market en masse in the near future.

The enforcement of sanctions against Russia’s economy in mid-2014, due to the Ukraine crisis, has been keenly felt in the local tech sector. US majors Microsoft, Oracle, MasterCard and Visa cut off services to sanctioned Russian businesses, while external financing has dried up for Russian start-ups. Most major Western tech firms that had considered entering the market have now placed their plans on hold.

In turn, Russia has looked to tighten control of its own tech landscape. A national payment system was launched in April 2014 to lessen dependence on foreign payment providers, and new legislation requiring all companies to store personal data on Russian citizens within Russian territory is to be implemented in 2016. The Kremlin is aiming to limit the digital levers that foreign countries may have over Russia, even at the cost of driving away foreign business.

However, Russia’s Internet landscape is largely driven by local champions, with brands such as Yandex, VKontakte, Ozon.ru and Mail.ru dominating over Western majors like Google, Amazon and Facebook. These local firms have been the primary drivers behind growing Internet penetration. Therefore, Russia is well placed to remain relatively self-sufficient in terms of online services. The bigger challenge for the country is likely to be coping without the requisite hardware in segments such as manufacturing, energy and high-tech, where domestic production is inexperienced and unreliable. The Russian state has given the go-ahead to finance new capabilities in satellites, navigational technology and even tablets.

Yet Russia is not planning on going it all alone. The deterioration of the relationship with the West has urged the country to enhance its bond with Asia. In October 2014, representatives of China and Russia signed a range of collaborations in segments spanning across energy, finance and tech. Agreements specifically in the tech field have also been drawn up with South Korea. The growing participation of Asian companies within the Russian digital market will become a trend, regardless of whether Western sanctions are lifted or not. China’s cross-border e-commerce player AliExpress.com, owned by the giant Alibaba Group, is already the most visited e-commerce site in the country. Meanwhile, Japan’s JCB and China’s UnionPay are two payment providers increasing their expansion efforts in Russia.

 

 

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