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Top Russian Finance and Tech Firms in Major Push With Gov't to Make Russia Digital Superpower

"This has become the modus operandi for the Russian government in the last years: sanctions have been turned to advantage and used as protectionist measures to carve out some space for Russia’s leading domestic companies to develop."

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Russia’s newly inaugurated president Vladimir Putin has tasked the government with making Russia a top-five global economy by 2024 the day he was confirmed in office for the fourth time. Several of Russia’s largest tech and financial companies have teamed up to deliver on that promise and completely transform the Russian online market.

According to the new May Decrees published on the Kremlin’s website, the Russian government must ensure that the country’s economy is “among the five largest by the end of 2024, with economic growth rates exceeding those of most countries and inflation at a level not above 4%.”

To carry this ambitious task off the state needs to stimulate technological innovation, encouraging the introduction of digital technologies in commerce and social sphere, and using modern technologies to develop a high-performance export-oriented sector, primarily in manufacturing and agro-industrial complex, the decree reads.

To give the outlined roadmap to Russia’s economic development a more institutional look, on May 15, Putin signed an executive order, changing the name of the Ministry of Telecom and Mass Communications to the Ministry of Digital Development, Communications and Mass Media, and appointed the former director of the government’s analytical centre, Konstantin Noskov, as its new minister.

At a recent press conference, the old-new Prime Minister Dmitry Medvedev reiterated the need to further digitalize Russia’s economy. “Of course we need to make sure the digitalization of Russia’s economy progresses at a rapid pace. This is exactly why a special ministry has been formed, to help achieve these goals – to create a legal basis for digitalization of a lot of different spheres of the economy,” Medvedev said.

Emerging tech giant

The ultimate goal of the Russian government is to wean Russia off the use of western-made (mostly American) hardware and software products and replace them with their made-in-Russia equivalents. For example, in the last two years, the proportion of Russian made software used by state employees went up from 20% to 65%, according to Tass. Moreover, the state-owned telecom company Rostelecom recently came up with an offer to the government to equip all state employees with smartphones running on a domestic operational system by 2019.

Apart from the drive to substitute foreign-made software and hardware with their domestic equivalents, the Russian government wants to see large technological Russian companies compete with giants like Google and Amazon, at least on a domestic level, and ideally even abroad.

One such example is a recent deal concluded between the state giants Gazprombank and Rostech on one hand, and the Kremlin-backed oligarch Alisher Usmanov’s Group and its subsidiary, the mobile company Megafon on the other.

The four players pooled their resources to create a new company called “MF Technologies” the purpose of, which is to provide a digital financial platform for new types of financial products. “At the centre of this new digital ecosystem will most likely be Megafon’s payment card, whose holders will get access to new credit, insurance and other products,” Megafon’s executive director Gevork Vermishyan said to Vedomosti. The necessary software infrastructure will be then provided by Rostech, a state corporation consolidating around 700 technological companies located all over Russia.

On the other front, according to the terms of the agreement, Usmanov’s Group, which controls and operates the largest and most popular Russian social networking site VKontakte, will get access to Gazprombank’s credit resources, which it will, in turn, offer its clients through the new digital platform. “The simplest service they can offer is money transfers, but crediting is more interesting. They can basically eliminate the need for the use of a credit card by bringing Gazprombank’s credit services into the new digital platform. This is what the Chinese companies like Alibaba or Tencent do,” an anonymous source quoted by Kommersant explained.

The project, largely based on a business alliance forged between Usmanov and Rostech’s CEO, and Putin’s former KGB colleague, Sergey Chemezov is completely in line with Kremlin’s new drive towards the digitalization of Russia’s economy. The project benefits all parties involved. It helps Rostech expand to the fast-developing high-tech consumer market. Gazprom will benefit from “digitalizing” its financial operations. And, last but not least, Usmanov’s Group will upgrade its operation to a new level by equipping its existing portfolio of strong IT companies (for example: VKontakte, Odnoklassniki, with a new financial platform.

Face off with “the Russian Amazon”

Arguably, the only company in Russia able to compete with Usmanov’s IT empire is Yandex. Often referred to in the west as “the Russian Google”, Yandex is the largest technology company in not just Russia, but all of Europe, and the largest search engine on the Russian-language internet (Runet). With a large presence in multiple countries of the former Soviet Union, Yandex is the fifth largest search engine in the world.

In April this year, Yandex entered a joint venture with Russia’s largest financial institution, the state-owned Sberbank, to develop the already existing Yandex.Market platform. Combining the enormous technological capabilities of Yandex with the existing infrastructure and technological resources of Sberbank, the two Russian tech/financial giants hope to develop a leading business-to-consumer e-commerce ecosystem. The new business venture has been valued at RUB60bn ($1bn), and both partners own equal stakes.

“Using Yandex.Market as a basis for our new project, we want to create a Russian Amazon,” head of Sberbank German Gref commented after the deal was signed.

Similarly, the CEO of Yandex.Market Maxim Grishakov stated that his company aims to “create one of the biggest players on Russia’s online retail market.”

“There are around 5-7 Russian companies that want to become the Russian Amazon. It will be an interesting competition and I will be following it with an enormous interest,” the deputy chairman of Sberbank Lev Chasis was quoted saying by the daily Delovoy Peterburg.

The new platform called “Beru” (I’ll take that) is currently in a test mode and should be launched in autumn 2018. Basically, Beru is an attempt to turn the shop aggregator Yandex.Market into a full-fledged online hypermarket, which will be selling its own products and services, in much the same fashion as Amazon. In other words, instead of redirecting its users to the partner’s websites to finalize their purchases, Beru will have its own warehouses where it will store all the products advertised on the website; the first warehouse was opened in Moscow in October 2017.

“Internet Sovereignty”

Russia is one of the few countries in the world where their national tech companies enjoy more popularity among its citizens than their American competitors. A case in point is the market position of the American Internet giant Google. According to Lifewire, in June 2017, Google occupied almost 70% of the global search engine pie, with the Chinese Baidu far behind at a second place with 18%.

While Google’s search engine is the undisputed leader among search engines in most both developed and developing countries (for example: Google has over 90% of the market share in Brazil, India, Spain, and Italy), in April 2018, Google’s share on the Russian market was “only” 43%. In fact, Yandex has been the most widely used search engine in Russia since October 2017, with a current market share of just over 53%.

Similarly, by far the most popular social networking site in the world, Facebook, doesn’t not enjoy a dominant position in Russia. While many Russian internet users use both Facebook and VKontakte, the Russian social networking site VKontakte is the most visited website on the Russian internet, leaving Facebook far behind.

After passing a series of laws designed to make it harder for US internet companies to operate in the country, like the law requiring foreign firms to store Russian users’ personal data on servers located in Russia passed in 2014, the Russian government could equally benefit from the emergence of the two competing financial/technological alliances.

This has become the modus operandi for the Russian government in the last years: sanctions have been turned to advantage and used as protectionist measures to carve out some space for Russia’s leading domestic companies to develop.

Food imports from Europe were banned which lead to the rapid growth in the domestic pork and cheese businesses. The protectionist measures work well because the Russian domestic market is so huge – one and half times the size of Germany – that there is plenty of space for profit making.

Now a similar strategy is being employed online, which is made easier by Russia use of the non-Latin alphabet, Cyrillic. However, the danger of protectionism is the dominant companies get lazy fed by the nipple of easy profits.

The jury is out on if the clearly highly innovative Russian tech companies can use this advantage to develop or will fall foul of their privileged position and end up falling behind the rest of the world.

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