Yandex: The end of an era for Russia’s most innovative firm

The Bell

It’s not a stretch to say that Yandex has a claim to be Russia's most successful and innovative company. Even Google's founders were interested in buying it at one time. The company strove to preserve its independence for 25 years, but now that part of its story seems to have reached its end. The Kremlin has long courted the company and soon, in place of founder Arkady Volozh, Yandex will have an entirely new, Kremlin-approved leadership and ownership team. The real beneficiaries of the new set-up may not be clear to the public.

A quarter-century struggle

The story of Yandex is an analogy for Russian business during the Putin era. Back in the late 1990s the company was an attractive prospect for international investors. Many Western firms wanted to buy out the company, Volozh recalled. But the Yandex founder was not prepared to relinquish control and in 2000 chose first Michael Calvey’s Baring Vostok, which acquired a 35.7% stake, as the company’s first major backer. Calvey himself was also a pioneer — one of the first and most influential foreign investors in Russia. Alongside Yandex, he invested in a string of private businesses and was one of the most successful and respected foreign investors in the Russian corporate world. He too would eventually come to be targeted by the state — being arrested in 2019 on charges instigated by a rival businessman with links to the Russian government.

Three years after that first investment round, Yandex's value had surged 10-fold and it had become a significant company on the international scene. At the end of 2003, Google founders Sergei Brin and Larry Page made an offer to buy the company. There were also talks with Microsoft and Yahoo, but Yandex’s founders realized that any deal would spell the end of their company. “There wasn't the necessary respect. To exaggerate, Google looked at Yandex like Walmart would look at a market stall,” investor Leonid Boguslavsky recalled in an interview with Liza Osetinskaya. Yandex decided not to sell, but to compete with Google for the position of market leader in Russia.

It wasn’t long before the Russian state started interfering in Yandex’s affairs. In early 2008 the company was preparing for its initial public offering (IPO) in the United States. But the Kremlin decided that the prospect of more foreign investment into Russia’s largest internet company wasn’t what they wanted. “Officials at different levels were talking in the corridors and in private meetings with the Yandex founders. They said that it was a good company, strategically important for the country, but that the shareholders were ‘wrong’ —  Western,” the RBK news site wrote some years later. That same summer, Kremlin-friendly billionaire Alisher Usmanov made a bid to buy a large stake in Yandex.

In 2014, Volozh said the situation with Yandex’s rapid growth and its IPO plans had spooked the Kremlin. “The state was really concerned: what has grown here, and who are these people? Can they be trusted? Someone stands nearby and whispers ‘how you can't trust them, you need to trust us. We are the good guys so you should help us to buy this business.’ It's a common situation.” Usmanov, meanwhile, said it was Volozh who was nervous at the time. “For some reason, Volozh was scared. I talked to him, apparently my energy had that effect on him,” he told Forbes in 2012.

Yandex’s shareholders rejected Usmanov’s involvement, but it was clear some kind of mechanism needed to be established to regulate the company’s relations with the Russian state. The Kremlin was taking more and more of an interest in Yandex. After the war with Georgia in August 2008, the presidential administration was extremely unhappy with coverage of the events online. All-powerful Kremlin official Vladislav Surkov turned up at Yandex HQ with a list of questions about how its news services worked. Volozh decided to tap Alexander Voloshin, former head of Boris Yeltsin's administration, as a go-between for Yandex and the Kremlin. By spring 2009, the company found shelter from its political problems: it sold a “golden share” to Sberbank for one euro, giving the state-owned lender a veto over any deal that would consolidate more than 25% of Yandex into any one single shareholder.

The compromise worked for a decade, enabling Yandex to calm the Kremlin and go ahead with its successful IPO in the United States. But it proved to be a ceasefire, not a lasting peace. By the late 2010s, Gref’s own tech ambitions had surged and he was trying to turn Sber — it had dropped the “bank” from its branding — into Russia’s top tech company. He needed more of Yandex. In October 2018, Sber proposed a deal to buy up to 30% of Yandex’s shares. Two sources told The Bell that Sber positioned its offer as a way to shield Yandex against possible future problems from influential individuals who had eyes on the tech company.

Those problems soon materialized. In 2019, Russian lawmakers proposed legislation that would ban foreigners from holding significant stakes in Russian internet companies. The author of the bill did not hide that the measures were aimed squarely at Yandex. The company, however, struck back, forging its own deal with the Kremlin to kill-off the oppressive legislation and, hopefully, settle the issue of political interference for the long-term. A new management structure was unveiled, handing the state even more control over Yandex. A Kremlin-approved body would have the right to block transactions worth more than 10% of Yandex, nominate two directors to the board and veto any decisions on issues affecting national security.

That was the settled status until February 2022. After Russia invaded Ukraine, Volozh decided to step away from his Russian businesses and remain in Israel. Giving up on involvement with Yandex’s Russian arm, he wanted to sell but keep the right to develop some of the company’s more promising international projects, such as cloud computing and self-driving vehicles. Thus Yandex had to once again enter into negotiations with the Kremlin over the fate of the company.

Inside the deal

The deal to sell Yandex’s Russian businesses was the result of more than a year of negotiations, and marks the culmination of the company’s 25-year struggle to grow and compete while maintaining its independence. The bulk of Yandex — businesses accounting for some 95% of its revenue — will go to a consortium of senior managers and four financial investors, split along the following lines:

  • 35%: Management fund made up of the company’s Russian executive team (up to 50 individuals)
  • 25%: Alexander Chachava, a venture investor, founder of the LETA Capital fund and owner of My.Games
  • 15%: A subsidiary of Lukoil, Russia’s largest private oil company. 
  • 15%: Pavel Prass, owner and CEO Infinitum, a depository for financial instruments
  • 10%: Alexander Ryazanov, a former Gazprom top-manager, now an independent investor and entrepreneur

With the exception of Lukoil, the other three backers have several things in common:

  • None of them have been involved in a comparable deal in the past 
  • None of them have at any time during the 18-month negotiations over Yandex been identified as potential purchasers
  • None of them are affected by sanctions (several sources close to the talks told The Bell on the eve of the deal that no sanctioned businessmen would be involved).

Ever since it became clear a sale was on the cards, sources have been telling The Bell and a range of other publications a completely different set of buyers was in the mix. But by the time the deal was done, all were under sanctions. Despite that, one of the most active negotiators was identified as Interros founder Vladimir Potanin, who was reportedly involved in the talks until the very last moment. 

Inside the Kremlin, the search for possible buyers was overseen by Sergey Kiriyenko. Some of the candidates being proposed were also said to represent the interests of Putin’s friend Yury Kovalchuk, several sources told The Bell. It seems Kovalchuk will have his interests represented, at the very least, by the relatively unknown businessman and investor Pavel Prass, who has been involved with companies controlled by Kovalchuk on more than one occasion.

Announcing the deal, Yandex said that there will be a one-year lock-up period, during which time the identified buyers cannot dispose of their assets. At the same time, the purchase of Yandex will be carried out via a closed mutual investment fund called Consortium.Perviy. By law, closed mutual funds are not obliged to disclose information about their beneficial owners. Therefore, those named in the deal could be replaced — as early as next year — without any outsiders knowing.

Yandex’s market capitalisation, at just over one trillion rubles, is close to that of Russia’s richest and most secretive oil company — Surgutneftegaz. The way this deal has been structured, a similar valuation may not be the only thing the two firms have in common soon.

The proposed new owners of Yandex declined to answer questions from The Bell for this article.

Volozh's future

After the separation, Volozh will continue to develop several of Yandex’s current early-stage businesses abroad, assuming European sanctions are lifted. Some of Yandex’s development teams did not wait for the formal division before moving to rename and reorganize their breakaway start-ups under the Yandex N.V. umbrella — Nebius (formerly Yandex Cloud), TripleTen (formerly Yandex Prakticum), Avride (autonomous vehicles) and the Toloka AI crowdsourcing project.

An initial deal was being formed on the assumption that part of the settlement would see Yandex N.V. receive a broad license to develop autonomous vehicles and cloud services. However, after Volozh's anti-war statement last summer, that has now come under threat. Now the talk is of temporary licenses, valid for a limited period of time. Two sources close to the matter told The Bell that after the license period expires, the code developed by Yandex would have to be rewritten, with one of them pointing out that would be a slow and costly process.

Why the world should care

For the millions of Yandex users, little will change. The search engine will continue to work; taxis and couriers will still arrive; and the same carsharing vehicles will be available. However, the Russian Yandex will likely have to abandon its Western ambitions. Meanwhile, there are big questions about whether and how Volozh's plans will work out while he remains under European sanctions. Despite the war, an internal split, scandals over censorship and the departure of some employees to the international arm, Russia’s most innovative company has largely survived with all its major products and money-making business units. Nevertheless, it’s not the same company as the one which spent 25 years creating and building them.

Valeria Pozuchanyuk, Irina Malkova

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