Weekly 27 July 2019

How to lose $1 bln in a week: new legislation could pave the way for the state to take control of Yandex

Hello! This week we explore a proposed new law that could have dramatic consequences for internet giant Yandex, one of Russia’s most successful companies. We also look at a report about Putin’s eldest daughter’s getting involved in big business, how a conflict over local elections in Moscow is escalating and highlights from The Bell’s interview with Aras Agalarov, the businessman who hosted Donald Trump in Moscow in 2013 and is featured in the Mueller report.

How to lose $1 bln in a week: new legislation could pave the way for the state to take control of Yandex

Source: Moscow Agency

The State Duma introduced legislation Friday to limit foreign ownership of “key resources for the Russian Federation’s IT infrastructure” to 20 percent. How this would work in practice is, for the moment, vague, but it looks a lot like a state attempt to gain control of ‘Russia’s Google’ – Yandex.

  • It is unclear how exactly the law would work. But “key resource” companies (an as yet undefined concept) in which foreigners own more than 20% will be added to a special registry and banned from placing any kind of online advertisements. However, the law will be selective in its impact: companies can lodge an appeal for an exception.
  • The legislation was introduced to parliament by Anton Gorelkin, an unremarkable deputy from the ruling United Russia party, but it was actually initiated by the Presidential Administration, according to two sources familiar with the drafting process. Gorelkin himself said that the main targets are Yandex and its competitor, Mail.ru. The legislation was intentionally introduced on one of the last working days for the State Duma ahead of the summer holidays so the government will have time to hold talks with Yandex about increasing state control over the company, a market source told The Bell. This is not the first time Yandex has had a chance to cozy up to the state: last year, state-owned banking giant Sberbank offered to buy a 30 percent stake in Yandex, The Bell reported. But the head of Yandex Arkady Volozh did not want to enter the negotiations.
  • Yandex said that such a law would destroy internet business in Russia, where local players are successfully competing with their global rivals — and users would suffer.
  • The proposed law was not the only bad news for Yandex this week: Sberbank and Mail.ru announced Thursday the formation of a joint venture that will include taxi service Citymobile (24,5% of Moscow taxi market) and food delivery service Delivery Club with $805 mln investment from Sberbank – an extraordinary sum for this market. These are all main competitors for Yandex — and the JV is being seen as a formal declaration of war by Sberbank (particularly considering that Yandex.taxi, 56,5% of Moscow taxi market, is preparing for an IPO).Two years ago, Sberbank and Yandex agreed to create a joint online marketplace, but, they were not able to come to an agreement, and now they are discussing scenarios for winding down the venture. Also, as a result of the deal, Sberbank faces a conflict of interest: the bank owns a golden share in Yandex, and its CEO, German Gref, is a member of the board of directors.
  • The news of the Sberbank-Mail.ru JV and of the new law led to a 7,4 percent fall in Yandex’s share price which totals to almost $1 bln of Yandex market capitalization.

Why the world should care

Yandex is Russia’s flagship internet company, a private entity built with local talent. It is Russia’s Google, Uber and Amazon rolled into one and not only do people use it every day, but foreign investors like the stock. If passed, the proposed legislation will have catastrophic consequences. Other companies may also suffer: job search company HeadHunter, which recently completed its IPO, online marketplace Ozon, and even AliExpress’ Russian business are all in the firing line. It would be yet another signal that, whatever government ministers say, foreign investment is not welcome in Russia.

The security services join efforts to stop protests in Moscow over local elections

Protests have continued this week in Moscow against a decision to stop independent candidates from running in elections to the city’s legislature. At the same time, the authorities appear to be doing everything they can to prevent a larger demonstration planned for Saturday: the homes of some of the barred independent candidates have been searched and several have been questioned by police, accused of breaking a law that carries a prison sentence of up to five years.

  • In order to compete in the September elections, candidates must gather supporting signatures from 3 percent of the residents of the district where they want to run. But the Moscow Election Commission rejected signatures collected by the independent candidates on dubious grounds. We wrote in detail about how this conflict erupted last week.
  • This week, the situation escalated. On Wednesday evening, the apartments of four independent candidates were searched by law enforcement officers and several others were called in for questioning over felony charges linked to pressuring members of the electoral commission. Prosecutions under this law are extremely rare but, if it is proven that members of the electoral commission were threatened with violence, the punishment up to 5 years in prison. News outlet RBC learned that a FSB department is leading the investigation.
  • One of the candidates who failed to get registered is Lyubov Sobol, a close ally of opposition leader Aleksei Navalny. She is currently in her second week of a hunger strike. After the Moscow Election Commission announced that her appeal against their initial decision had been thrown out, Sobol said she would continue her hunger strike in the election commission offices. But this just led to police forcibly carrying her out of the building on a couch.
  • Several people, including Navalny, have been jailed for 30 days for calling on people to attend a protest in front of the Moscow legislature this Saturday that does not have permission from the authorities to go ahead. The demonstration is very likely to end in many arrests.
  • The police have warned that the protest is unsanctioned and journalists have been asked to apply for accreditation (this has never before been required). Officials have also said that they will be looking for draft dodgers at the rally.

 Why the world should care

Moscow’s legislature doesn’t have much power, and its elections have never before generated such interest. But the exclusion of all opposition candidates has upset thousands of people and Saturday’s protest looks set to be one of the largest in years, perhaps even surpassing the 20,000 people who turned out a similar demonstration last weekend. Several media outlets are predicting a police crackdown, suggesting that the security forces want to do everything to prevent Ukraine-style sit-in protests.

Putin’s eldest daughter is set to build a $630 million cancer clinic

The Russian president’s eldest daughter, Maria Vorontsova, will play a key role in the development of a new cancer clinic outside of St. Petersburg via the New Medical Company of which she is co-owner, according (Rus) to the BBC Russian Service. Investors in the project include Russia’s largest insurer, Sogaz, which has Yuri Kovalchuk, a billionaire from Putin’s inner circle, among its shareholders.

  • What do we know about Vorontsova? According to public data, Vorontsova graduated with a medical degree from Moscow State University in 2011. She then worked at the Institute of Child Endocrinology and completed a graduate degree. According to the BBC report, Vorontsova completed her dissertation in 2017 and is now deputy chairman of the Russian Society of Young Endocrinologists. In recent years, she has been shown on state-owned television channels in her capacity as a board member of New Medical Company, and as a scientist working for an endocrinology research unit under the Ministry of Health. Vorontsova’s husband is reportedly Dutch entrepreneur Jorrit Joost Faassen, who came to Russia in 2006 and, at least initially, worked in a senior role for state-owned gas giant Gazprom.
  • What is the project? The plan is to build a huge cancer clinic outside St. Petersburg, which will cover 200,000 square meters. Sogaz, which insures staff at state companies like Gazprom, oil company Rosneft, and nuclear agency Rosatom, will provide up to $630 million for the construction. A major shareholder of Sogaz is Putin’s friend, Kovalchuk, and the deputy chairman of the company’s management board is Mikhail Putin, the son of one of Putin’s cousins. Sogaz is run by Anton Ustinov, a former energy advisor to Putin. The center itself will provide free medical care and plans to treat 2,000 cancer patients annually (about 5% of all cancer patients in Russia).
  • What is the connection to Vorontsova? The overseer of the new cancer center could be New Medical Company (they would be responsible for HR, equipment supply, and operational management). Vorontsova is one of the firm’s five owners.

Why the world should care

Putin has two daughters, but unlike most leaders, he is never seen in public with them and little is known about them. Given the difficulty in obtaining information, the media is forced to use the strange phrase “supposed daughters”. Media investigations several years ago revealed more about the two women and we know that Putin’s youngest daughter runs a fund called Innopraktika, which wants to create a Russian Silicon Valley. Much less was known about Vorontsova, and, until very recently, her role in multi-million-dollar business deals was not public.

‘Why didn’t Mueller find anything? Because there was nothing!’: The Bell interviews Aras Agalarov

Russian election meddling remains highly-discussed in the U.S. and it was at the center of the political agenda this week during special prosecutor Robert Mueller’s seven-hour testimony to Congress. The Bell recently spoke to businessman Aras Agalarov (the 51st richest person in Russia, according to Forbes), whose name featured prominently in Mueller’s report. It was Agalarov who helped organize the famous meeting with lawyer Natalia Veselnitskaya at Trump Tower when she allegedly handed over compromising material on Hillary Clinton to the Trump campaign. Agalarov also hosted the 2013 Miss Universe contest in Moscow, which was attended by Donald Trump. Our entire interview with Agalarov can be found in Russian here, but we have selected five of the most important quotes:

On that meeting in Trump Tower: “I knew [Natalia] Veselnitskaya, she didn’t work for me, but she worked on land issues in the Moscow Region. She simply approached me, said that Denis Katsyv [Veselnitskaya’s client and owner of Prevezon Holdings, whose involvement in fraud was alleged by lawyer Sergei Magnitsky who died in a Russian prison] was the subject of a lawsuit, and needs help — in fact I knew him too. She asked if I could organize for Trump’s team to help give her access to the Senate. There was no discussion about the Democratic Party, nor about compromising information [on Clinton]. I didn’t even imagine then that Trump would become president. And she didn’t ask for a meeting with his son, the request was just to meet someone.

It was not a very serious request in my mind, and I passed it onto Emin [Agalarov’s son with whom The Bell spoke in March], and he passed it on to [his former PR agent] Rob Goldstone… when someone asks me for help, I always help, that’s just my nature.

Veselnitskaya didn’t lobby for anything beyond what was in her interests as an attorney… She simply framed it in such a way that it would be interesting for the other side. It was clear five minutes after the start that the meeting was pointless. Natalia arrived with small, petty questions. In the end, the meeting only lasted 10 minutes. Why didn’t Mueller find anything? Because there was nothing!”

On the Democratic Party’s lawsuit against Agalarov: “My attorney says that we will receive money from them for legal expenses and attorney costs. They don’t have any evidence, not even a hint.”

On his relationship with Trump: “I like him: he is smart, agile, and nice in person. But I didn’t loan him money and I understand that when he declared bankruptcy his creditors might not have seen him in the same light.”

On his relationship with the U.S.: “I always predicted that not everything was well there. But on the whole, not much has changed, I understand that we were simply used by one [political] group]… In a battle one can use everyone.”

On Trump in Moscow: “On the first day, he came directly from the airport [to the Miss Universe venue] and inspected everything. It was interesting for him. On the second day, we picked him up from the hotel and drove him to a meeting with businessmen. [The head of Russia’s largest bank] German Gref was there, and some others. We sat for two hours, it was a good conversation. Then we watched the rehearsal, this was November 8 — I remember because it was my birthday… On the evening of November 8, we invited over a large group of my friends and the Trumps stayed very late; he left at 2am. The next day he arrived early because he was nervous about how everything would go.

When I hear all those stupid things about the video, prostitutes [from the dosier compiled by former MI6 agent Christopher Steele], I don’t understand how a man just short of 70 could do it all! He spent the entire first day with us, then supposedly invited prostitutes to his room, in the morning had an early meeting with businessmen, and then was with me until 2am… It’s simply total, crazy nonsense.”

Anastasia Stognei