State-controlled bank to buy control of Russia’s flagship private internet company

State-controlled bank to buy control of Russia’s flagship private internet company

Sberbank CEO Herman Gref (left), Prime minister Dmitry Medvedev and the founder of Yandex Arkady Volozh at a tech conference in Moscow, 18th October 2018. Photo credit: TASS/Aleksandr Astafyev

What happened

On Thursday, The Bell found out that Russia’s largest bank, state-owned Sberbank, is in talks to buy a 30% stake worth about $3.8 billion in Yandex, the country’s biggest private internet company. Sberbank argues it will help protect Yandex, but this looks like it could be yet another Russian story of the state seizing flourishing private companies — and it raises a host of questions about the future of Yandex. In the 2 days since the news of talks became public, $2 billion has been wiped off Yandex’s market capitalization in New York.

• Two sources close to Sberbank management and the negotiations told The Bell about the ongoing talks. The bank is asking for a 30% stake in Yandex, they said. A veto right on key decisions is also being discussed, one of the sources confirmed. There isn’t a framework for the deal yet, but various options are being discussed — from a new share issue to a share buy-back on the open market and the sale of Yandex’s primary shares. Sberbank deputy CEO Lev Khasis is reportedly leading the negotiations for the bank.

• Yandex is Russia’s largest internet company in terms of revenue and runs Russia’s most popular search engine (with a 56.2% market share); the country’s largest online marketplace, Yandex Market; and its largest taxi service, Yandex Taxi. At the beginning of this year, Uber bought 36.9% of Yandex Taxi after losing a battle for the Russian market. In the deal, Yandex Taxi was valued at $3.8 billion.
• Sberbank argues the deal would protect Yandex from potential trouble — for example, from competitors. This summer, Yandex was involved in a public spat with another state-owned company, Gazprom Media, which led to threats of a ban on Yandex’s video service. In a conflict with rights’ owners, whose losses from piracy were estimated by to be more than $1 billion in 2017, Yandex now finds itself almost alone, said sources at a major internet company and a government official.
• Sberbank and Yandex already have some joint projects: in 2012, the bank bought 75% of the Yandex Money payment service. This spring, they closed a deal to create a joint company in the online retail segment, which was immediately compared to Russia’s Amazon.
• Sberbank already has a golden share in Yandex, which it received in 2009 and which gives the bank the right to veto ownership changes. Back then, the government was discussing the possibility of creating a national search engine and purchasing 10% of all strategic tech companies. When Yandex gave Sberbank the golden share before its IPO, this was also a guarantee for the government that the company would not fall under foreign control.

Why the world should care

The Russian government has been firm in its intention to sponsor tech innovation through state financing. Just this week, officials presented a Digital Economy blueprint in which $17 billion will be invested in digital projects. Amid all this, Yandex remains the only large Russian internet company not controlled either by the government or its close allies, like Alisher Usmanov. If Sberbank takes control of Yandex in an unfriendly acquisition, it will be a sign for all tech entrepreneurs in Russia: if you become big enough, the state will come after you.

Orthodoxy’s schism is straining the loyalty of Russia’s religious billionaires

What happened

The rift between the Russian Orthodox Church and the Patriarch of Constantinople has become a personal tragedy for some Russian Orthodox billionaires. Since the early 2000s, the Orthodox monasteries on Mount Athos in Greece have been major cult symbols for religious tycoons, who have invested over $200 million in reconstruction and restoration. Now the Russian Orthodox church is banning them from making pilgrimages to Mount Athos.

• On 15 October, the Russian Orthodox Church broke ties with the Patriarch of Constantinople, considered the leader among equals in the worldwide Orthodox Church. The reason for this step was that the Patriarch of Constantinople has taken major steps towards the recognition of the independence of the Ukrainian Orthodox Church.
• “I have no words. It is a tragedy,” one Forbes list billionaire said. “Last weekend was the last time Russians could take communion at their monastery in Athos. From now on, they will only be able to visit as tourists.” The Russian Orthodox Church has explained that its adherents can visit Mount Athos but cannot perform the sacraments, take communion or confess. For most Orthodox believers a pilgrimage is now meaningless.
• In 2005, President Vladimir Putin visited Mount Athos and Russian officials and businessmen travel there regularly. Particularly fans include: billionaire Arkady Rotenberg who is close to Putin (net worth $3 billion); owner of chemicals company Phosagro, Andrei Guriev ($4.5 billion); and Greek-Russian tobacco magnate Ivan Savvidi ($1.9 billion). The largest charitable donors to Mount Athos’ monasteries are billionaire Oleg Deripaska, the owner of aluminium producer Rusal, and former head of Russian Railways, Vladimir Yakunin. Since 2005, Russian business has collectively invested $200 million, according to calculations by the BBC Russian Service.
• Now the Russian Orthodox Church is hinting that such donations would be better spent in Russia. “I would advise [businessmen] to shift their attention to Russian monasteries and invest in them… If there is a desire to donate one’s wealth for a good cause, then we have no fewer places of worship, and actually, quite a lot more,” said Church spokesman Metropolitan Ilarion.

Why the world should care

Supporting Orthodoxy is a major part of the Russian government’s conservative platform and for officials, ostentatious religiosity has long been a part of the job description. The same is true for businessmen, who are expected to donate funds to restore churches. However, some officials and billionaires are actually genuine believers. They visit the elders of Mount Athos on a regular basis and they believe they are accessing a higher wisdom. These people, who are loyal to the Russian Church, now find themselves in an extremely difficult situation.

Putin ramps up aggressive rhetoric against the West

What happened

Putin gave one of his strangest speeches of the year on Thursday. He used harsh language to tell the West he is not afraid of a nuclear war because Russians, as martyrs, will all go to heaven. This was said at the Valdai Discussion Club, an annual showpiece event where Putin talks in front of international Russia experts. Here are a few quotes:

• On conflict: “We are not afraid of any kind of conflicts. We are actually not afraid of anything. A country so large, with such defense systems, with such a population, is ready to defend its independence. Not all countries have citizens who are prepared to give their lives for their homeland. And no one can do anything to change this.”
• On nuclear war: “We live in a world in which the basis for security is one’s nuclear potential. Russia is one of the leading nuclear powers. So far, no one has precise hypersonic weapons; we have surpassed everyone in that area. Are we prepared to use nuclear weapons to defend ourselves? In our concept of nuclear weapons there is no such thing as a defensive strike. Our concept is to respond with a counter blow. This means, that we will use nuclear weapons only when we are certain that the potential aggressor will strike Russia. Of course, this is a catastrophe, but we cannot be the initiators. The aggressor must know that retaliation is inevitable, and he will be destroyed in any case. And we are then the victims of aggression. And we, like martyrs, will then go to heaven. And the others will simply die. Because they will not even have time to repent.”
• On Donald Trump: “Despite the attempt to discredit these meetings, they were more positive than negative… It is better to communicate and make contact with each other, than to argue and fight without end. He [Trump] and I have a good relationship, a professional dialogue. He listens and responds to my arguments.”
• On the murder of Jamal Khashoggi: “The journalist actually lived in the U.S. And in that sense the U.S. has a certain responsibility for what happened to him. We should wait for the results of the investigation. As far as I know, the man was part of the Saudi elite and he was affiliated with those in power. We don’t know what really happened. I hope that evidence will be presented. On that basis, we will make our decisions.”
• On abandoning the U.S. dollar: “The president of France said recently that Europe must increase its economic and financial sovereignty. This means an exit from the dollar. I said recently that our American friends are chopping down the branches they are sitting on. They are creating doubt in the reliability of the dollar as a universal instrument for international transactions. This is a typical mistake made by an empire. Because the empire thinks that it can make some little mistakes, because it is so strong, that this doesn’t mean anything. But the moment will arise when it can’t cope with the amount of mistakes it has made.”
• On an increase in global tensions: “There is an old joke. A classic. Question: How do you relax? Answer: I don’t get stressed.”

Why the world should care

Putin’s speech at the Valdai Discussion Club is the Russian president’s main vehicle for addressing the West. This year, it illustrated a shift in Russia’s foreign policy. Just a year ago, Putin’s tone was far more reserved: he spoke about “a disbalance between cooperation and competition” and called for “untangling rather than smashing”. This year was different: Russia’s official message to the West is obviously more belligerent.

Regulator to crack down on small businesses offering money laundering services

What happened

Russia’s new anti-money laundering campaign is picking up speed. As a result of the Central Bank’s drive to shut down bad banks it has become more and more difficult to launder money, so this business has been taken over by restaurants, stores and car dealerships (have you ever wondered why so many upmarket Moscow restaurants insist you pay in cash?) But now the the regulator has announced it is considering new powers to block the bank accounts of such companies if there is even a hint of money laundering.

• Using small businesses to launder money is an easy way of confusing the authorities and the scheme is very simple. In the example of a restaurant, diners are obliged to pay in cash. But instead of being put through the restaurant’s register, this cash is used to run a money laundering service on the side. An individual who needs to launder their money makes an electronic payment to the restaurant (under the cover of a contract for food supplies or services) and, off the books, the restaurant hands over cash, making a profit on the difference. On each such transaction the restaurant would make about 12% commission — and the profit margins on such deals are reportedly rising.
• If you have spent time in Russia in recent years, you have likely been in a situation in restaurants where they insist on cash payments. Have you ever wondered why?  In Russia, especially in major cities, you can pay with a card practically everywhere: from subway tickets to markets. Even in cases that normally would be cash only, there is the option of transferring money via mobile banking apps. Everyone uses them: even if you flag down a taxi, you can just transfer money to the driver’s card.
• This scheme isn’t new, but it has recently become more widespread. In 2016, Forbes reported about a chain of steakhouses that generated 50 million rubles in cash each month that they then sold on the black market for a profit margin of 5-10%.

Why the world should care

If a Moscow restaurant suggests you pay in cash, rather than by card, there is a pretty good chance your payment will later be resold at a profit. But don’t panic — it’s possible the restaurant’s card machine is temporarily broken or just that the restaurant’s management is trying to avoid paying the bank commission for card transactions.

News in brief:

New statistics out this week leave no room for doubt: real incomes, which this year has fluctuated, are dropping. In September, real incomes fell by 1.5%. In 2019, they will continue to fall, warned Aleksei Kudrin, the frustrated reformer and current head of the Audit Chamber. Experts describe the consumer economy as “hopeless in the long run”.

The picture is totally different for Russia’s wealthiest citizens against whom (in theory) U.S. sanctions have been aimed. Despite this, the top 10 billionaires of the Russian Forbes list saw their collective net worth rise by 10.8% this year, which is the largest rise in the world when compared to the top 10 individuals of the Forbes lists in all other countries.

Peter Mironenko

Editing by Howard Amos

This newsletter is supported by the Investigative Reporting Program at UC Berkeley.