Weekly 12 July 2022

Divisions at Yandex

Hello! This week we look at how the war in Ukraine has roiled Yandex — the ‘Russian Google’ — amid different approaches to strategy and many top managers leaving the country. We also look at why the state decided gas giant Gazprom would be making no dividend payments this year, and why the ruble plunged last week.

War in Ukraine Causes Cracks at Tech Giant Yandex

All Russian businesses are struggling with the fallout from the war and Western sanctions, but perhaps the most dramatic events have unfolded at Yandex, the ‘Russian Google’. But compromises with the authorities — in pre-war times, a necessary evil — have led the country’s leading IT company into a trap. Founder Arkady Volozh and head Tigran Khudaverdyan were sanctioned by the European Union. And Yandex is divided internally. Some top managers left the country and are trying to salvage what they can from abroad; others remain in Moscow and are determined to save Yandex’s Russian business.

  • A few years ago, Yandex was thriving. As recently as 2021, it was worth up to $23 billion — more than any other Russian tech company. Over 15 years, the company managed to fight off its biggest rival, Google, on its home turf, defeat and buy out Uber in the taxi market and position itself as a future leader in the self-drive market. The company’s founder, former mathematician and programmer Arkady Volozh, successfully fended off two hostile takeovers backed by individuals with close ties to the Kremlin — billionaire Alisher Usmanov and state-owned banking giant Sberbank. In the second half of the 2010s, Volozh handed over day-to-day operations to a team of young managers led by the former director of Yandex.Taxi, Tigran Khudaverdyan. Volozh now spends most of his time in Israel, but still has a strategic leadership role and a controlling stake of Yandex’s voting shares.
  • Saving the company from hostile takeovers came at a cost. In 2009, Yandex was forced to transfer a “golden share” to the state — in effect, giving the Kremlin a veto over key decisions. On top of this, Yandex, which remains Russia’s most popular website, had to compromise with the government over its media products. The most significant of these compromises was over Yandex.News, a popular news aggregator. The company complied with each new law so that, when the war started in February, Yandex.News was only using state-approved media sources.
  • The invasion of Ukraine almost immediately split the Yandex team into two camps. The first disagreements emerged when the Kremlin summoned leading Russian companies to a meeting with President Vladimir Putin in the days after the invasion. Khudaverdyan represented Yandex at that meeting. While many colleagues tried to dissuade him from attending, ultimately, it was decided that when the head of state calls, Yandex needs to answer. Within a month Khudaverdyan, along with every other participant of the meeting, was sanctioned by the EU.
  • At the start of the war, top Yandex managers found themselves in different countries, and the team was gradually divided into those who left and those who stayed. “We quickly found ourselves in a situation where each side started to justify itself and its decision. Those who stayed spoke of pressure and politics and were met with constant criticism. Those who left remained in their bubble, remote from reality. Overall, it’s a story of human tragedies,” one Yandex employee said. Even though many of the team were old friends, the gulf between them widened fast.
  • Volozh quickly decided he was ready to dispose of Yandex’s Russian assets, one of his acquaintances told The Bell. But it wasn’t that easy. The company was losing value, it was politically sensitive and his colleagues in Russia persuaded Volozh to “sit tight.” One of the supporters of this policy was Alexander Voloshin, a former Kremlin chief of staff turned Yandex board member and the company’s key connection with the authorities.
  • Eventually, on June 3, Volozh was also targeted by EU sanctions, greatly complicating his dream of building a big, multinational business out of Yandex’s services. Volozh had thought up many international projects but none of them had become a fully-fledged business before the start of the war. The best developed of these is a drone firm, which the company launched in the United States. However, trials were halted immediately after the invasion.
  • As the war drags on, the gulf between Yandex managers at home and in emigration gets ever wider. Volozh still wants to take everything that can be salvaged out of Yandex as soon as possible and develop it outside of Russia. But that plan could not be enacted quickly: more than 90 percent of Yandex’s intellectual property is held in Russia, and it’s hard to imagine the Kremlin would allow such a move. Moreover, Yandex’s foreign business is not profitable. All attempts at international expansion are financed from what the company earns in Russia.
  • In a bid to convince the Kremlin that his proposal had legitimacy, Volozh turned to Alexei Kudrin, the head of the Audit Chamber and a trusted member of Putin’s circle. Last week, independent media outlet Meduza reported on the possibility of Kudrin joining Yandex. A government source told The Bell that this most likely refers to the prospect of Kudrin joining the board of directors. Early in the war, Kudrin frequently flew to Israel, where Volozh lives, and in mid-June, at a meeting with Putin, he may have raised the issue of Yandex, a source told The Bell.

You can read the full story of Yandex’s split, and the efforts of shareholders and management to save Russia’s biggest IT company on The Bell’s website.

‘State Fraud’: How the Russian Government Took $10bln From Investors

Investors in Russia have lost huge sums this year — but, last month, the state had another nasty surprise for them. Despite promises of a record 1.244 trillion rubles ($20 billion) dividend, the government decided that state-owned gas giant Gazprom should be raided to help offset a drop in revenue. Despite Gazprom’s record profits — thanks to soaring gas prices — for the first time in 25 years, shareholders were left with nothing.

  • In January, Gazprom head Alexei Miller promised record dividends from last year’s record profits. At the end of May, this was the official recommendation of the board of directors. However, in late June it emerged that the government had nominated Gazprom as the main provider of additional revenues for a budget stretched by the need to find 8 trillion rubles ($130 billion) to protect the economy from the consequences of the war. They decided to impose a one-off windfall tax on Gazprom worth 1.248 trillion rubles – a figure suspiciously similar to the total projected payment to shareholders. The state, which owns 50.3 percent of Gazprom, would only have got half that figure via dividends.
  • A Gazprom shareholder meeting on June 30 was told that, for the first time since 1998, the company would pay nothing. Investors were outraged, and Gazprom shares plunged 30 percent before trading was suspended.
  • But the raid on Gazprom was done in a particularly cynical way. The first rumors of a new tax for Gazprom — and their later confirmation as amendments to the tax code — were formulated in such a way that the market concluded the liability would be 416 billion rubles. The Finance Ministry did nothing to correct this misapprehension and the company’s stock rose. The official clarification only came after the decision to suspend dividend payments.
  • By failing to deliver on promised dividends, the state has irritated hundreds of thousands of people. Gazprom is the most popular share held by Russian small investors: according to figures for June, Gazprom makes up 36.5% of the shares of retail investors on the Moscow Exchange (a total of 19.8 million people). More than 470,000 accounts include shares in Gazprom, according to the company itself.
  • Why was the state unconcerned about angering so many people? In all probability, it concluded that there would be nothing to grab in the second half of the year: so it was now, or never. The government likely assumes gas export volume to Europe will remain low or dwindle to almost nothing, said Sergei Kaufman, an analyst at FG Finan. Exports to Europe are the most vulnerable part of Gazprom’s business and losing them in the near future would be a big blow. The authorities may decide to use Gazprom as a political weapon, which would also cause a slump in exports. The large number of foreign investors among Gazprom’s shareholders (as many as 25%) may also be a factor in the government’s decision.

Why the world should care

Gazprom’s decision to scrap dividends is a clear demonstration of why the Russian market is one of the cheapest in the world. When the country’s most popular company fails to pay its dividends, this negatively affects everything. Meanwhile, for Gazprom, investment will simply grind to a halt. Corporate governance and a lack of accountability may be direct consequences of the current geopolitical situation, but playing fast and loose with dividends and economically unsound taxes are a sort of government fraud, a source in one investment company told The Bell. Even when the Russian market has a chance to rebuild its reputation, it will take many years to get over this sort of trickery.

How Long Will the Ruble Continue to Weaken?

Russia won its first victory in a battle against the “currency miracle” that has seen the ruble almost double in value despite Western sanctions imposed as a result of the invasion of Ukraine. After Finance Minister Anton Siluanov said the government was considering currency interventions (something, in reality, that would be difficult to do against the U.S. dollar or the euro), the ruble fell 25 percent against the U.S. dollar. But analysts are reluctant to proclaim that the tide has turned.

  • The ruble’s fall last week was as rapid as its rise in mid March when it became clear that, while imports had almost halved, foreign currency earnings from exports remained at the same level. That added up to a powerful surge in the ruble that surprised many. In early March, at the height of the post-invasion economic shock, the ruble plummeted to 130 against the U.S. dollar, and three weeks later it had risen to 50 against the greenback – a level not seen since 2015.
  • But the ruble lost over 25 percent of its value to hit 64 against the U.S. dollar Sunday. This rapid fall is due to a combination of factors. Firstly, the market clearly believed the Finance Ministry’s promise to start intervening on the market to weaken the ruble. Siluanov said that the Finance Ministry might start to buy currency from “friendly nations” (in effect, the Chinese yuan). Secondly, we’ve reached the end of the latest round of tax and dividend payments in Russia that obliged exporters to buy rubles. The total dividends paid by Russian companies fell 40 percent after Gazprom announced it wouldn’t pay out an expected 1.2 trillion rubles. Thirdly, amid growing fears of a recession in the U.S., oil prices fell sharply — Russia’s economy is currently far more dependent on oil than before the war.
  • A weaker ruble is exactly what the Russian government wants. A rate of 50 rubles to the U.S. dollar is a catastrophe for the Russian budget and another obstacle in the way of the government’s pipe dream of “import substitution.” Deputy Prime Minister Andrei Belousov has said more than once that the rate should be back at the pre-war 70-80 rubles to the U.S. dollar and even suggested abandoning the ruble’s free-float. Central Bank head Elvira Nabiullina predictably spoke out against that idea — and looks to be winning the argument.

Why the world should care

Analysts have long said that the ruble’s rise would not last forever. Russian companies will gradually find new suppliers to replace Western ones and the country’s import gap will close. By the end of the year, most experts anticipate the ruble will be worth about 70 to the U.S. dollar. But it is not certain that last week’s events were the final reversal: there’s too much unpredictability. To fully reverse the trend, Russia needs a sustained import recovery.