The Yandex Affair: Insider Trading and Institutionalized State Control

One of the most commented developments in Russian business news this past November was the reported attempt to “nationalize” one of the country’s largest high-technology companies, Yandex. Russia’s leading search engine, Yandex holds 51 percent of the domestic market share in its category and is the fifth-most-used search engine worldwi­de; at the same time, the company is an important e-mail service provider in Russia, though its popularity has been falling due to the relatively poor quality of its digital offerings (Netmarketshare.com, Tendence.ru, accessed December 4). In recent years, the firm successfully di­versified, gaining control of huge segments of money transfer operations thro­ugh Yandex.dengi and taxi services through Yandex.taksi. But at the same time, it has lost some share of its core business: Yandex’s dominance of Internet searches in Russia dropped from 60 percent in 2009 to a bit more than 50 percent in late 2018 (RBC, October 19, 2018). The company is incorporated in the Netherlands, with 15 offices throughout the world, and it trades on the NASDAQ since 2011.

More than ten years ago, the Russian government began trying to wrest some control over the private Internet company. In 2009, Yandex was forced to sell a “golden share” to Sberbank for a symbolic Є1, allowing the sta­te-owned bank to block any sale of the company’s stock representing more than a 25 percent stake (RBC, October 19, 2018). After Vladimir Putin returned to the Kremlin in 2012, the state interfered in Yandex’s business dealings more directly, forcing its search engine to serve up more “politically correct” results to users (Novaya Gazeta, November 19, 2019). Notably, Yandex searches started omitting news about protest and opposition activity in the country. It also blocked the “electronic wallets” opened to rai­se money for organizing street rallies or support political prisoners (Lenta.ru, January 23, 2017); and opposition activists’ e-mails were often “leaked” to the Russian police and security services.

The latest affair involving Yandex actually started in July, when State Duma (lower chamber of parliament) deputy Anton Gorelkin introduced a bill limiting foreign ownership in Russian Internet businesses to 20 percent of voting shares (Forbes.ru, July 27, 2019). The initiative mirrored previous legislation that had similarly limited foreign ownership of Russian media outlets to under 20 percent (TASS, October 15, 2014); the same is now reportedly under consideration for private Russian healthcare providers (Aif.ru, November 29, 2019). Gorelkin’s bill disturbed the markets. It also sparked rumo­rs that Sberbank—a poorly managed state-run institution famous for unprecedented leaks of its clients’ personal data (Popmech.ru, October 3)—would attempt a complete takeover of Yandex in a bid to expand the bank’s online financial services. Yandex’s main shareholder, Ar­kady Volozh, initiated talks with the Kremlin, actually trying to play several groups of insiders against the others (T.me/kremlebezBashennik, November 18). Ultimately, Yandex and the Kremlin agreed to set up a special foundation in the “free economic zone” in Kaliningrad Oblast that will buy the “golden share” of Yandex from Sberbank, which today permits the blocking of all deals worth 10 percent or more of the total sta­ke. The Kaliningrad-based foundation will send two “special directors” competent in na­tional security issues to the Yandex Managing Board. And the number of top managers on the Board of Directors will be limited to 3 out of 11. Finally, Yandex’s founder and CEO, Volozh, is forbidden from selling his shares for at least three years (Yandex.ru, November 18). The same day the deal was announced, Gorelkin withdrew his purportedly national security–motivated bill on technology firm ownership from the Duma (Interfax, November 18).

Based on this series of developments, it is misleading to suggest Yandex was “nationalized.” Arguably, the Russian state simply secured its privilege to block any possible attempts to sell Yandex to a genuine foreign investor (Volozh is considered a “reliable” owner, and the company is, in fact, controlled by Russian shareholders). The new arrangement also institutionalizes the government’s ability to censor­ Internet searches and its prerogative to look through the e-mails and financial transactions of Yandex’s clients (which, in fact, is not a new capability). In other words, impro­ving state control over the Russian Internet giant was mainly a collateral benefit as individuals close to the Kremlin pursued a more corrupt objective.

Yandex never attracted overwhelming foreign investment interest: its valuation had topped out at $12.3 billion in 2014, while Baidu, its Chinese competitor, now trades at around $27 billion. What happened in recent months instead looks more like a massive case of insider trading. Namely, when Duma member Gorelkin introduced his foreign ownership bill in late July, Yandex’s shares declined by 6 percent; and as Sberbank stepped in, the downward trend intensified, lowering the stock price from 2,520 ($39.44) to less than 1,900 rubles ($29.74) (Moex.com, accessed December 4). In just ten weeks, the company lost more than a quarter of its value—206 billion rubles ($3.2 billion). Considering how rapidly the Duma bill was ultimately withd­rawn and how fast the stock price recovered—the entire decline was eliminated between November 14 and 19—the affair surrounding the “nationalization” of Yandex points to a sophisticated market manipulation scheme that might have benefited se­veral high-ranking government officials or the financial institutions they allegedly control. Indeed, similar such schemes in the past have involved major Russian companies such as Vkontakte, Yukos or Mechel Steel—frequently with direct involvement from Putin (Vedomosti, August 9, 2018; Izvestia, June 17, 2004; Newsland.com, July 28, 2008). But most of those were more spontaneous and seemingly less well organized.

Purportedly, Russia is currently pouring massive resources into developing its high-technology sector, embarking on the “digitalization” of its economy and making the country a champion in artificial intelligence (AI) research (see EDM, May 16, 2017, December 13, 2017, March 13, 2019, November 19, 2019). But all of these plans, especially from a commercial perspective, are doomed by systemic failures and limitations. Russian digital industries—from Internet businesses to mobile banking—are plagued by extremely poor data protection, for example. At the same time, state-organized “high profi­le” tech events (Kremlin.ru, November 9) are little more than Potemkin villages, showcasing technology that remains underdeveloped or entirely unworkable. Notably, none of the 242 speakers at last month’s prestigious World Summit AI conference in Amsterdam represented Russia (Worldsummit.ai, accessed December 4). As the Russian high-technology industry becomes increasingly self-isolated and state-managed, this sector can look forward to a progressively dim future in which its main value seemingly comes from involvement in special insider trading schemes orchestrated by Kremlin-aligned elites.