Russian internet businesses fight to survive

Tougher domestic regulations and a struggle to survive in times of global cyber warfare have seen Russian internet businesses caught between a rock and a hard place.

Recent obsession over the artificial intelligence (AI)-driven photo editing app FaceApp, that includes a variety of filters to change a person’s appearance, is the latest example of the dichotomy faced by Russian internet companies. Despite global popularity and more than 12.7 million new downloads since July 10, the app, developed by a relatively unknown Russian company, was ultimately labeled as a privacy threat in Washington by the Democratic National Committee and Senate Minority Leader Chuck Schumer.

Although the developers released a statement explaining how the data of app users cannot be breached, this failed to soothe alarmist fears.

Robert Muller’s revelations of Russian operatives’ coordinated attack on the US political system and multiple other documented misdeeds of Russian hackers have left a lasting perception of Russian companies and professionals involved in the IT sector. Although to a certain extent the attention elevated the popularity of Russian software engineers within the corporate sector, it likewise boosted toxic attitudes surrounding Russia’s internet products and complicated further Russian involvement in worldwide markets.

With the state running a large portion of and maintaining a tight grip on key sectors of Russia’s domestic economy, there is suspicion over the capability of Russian internet businesses to balance their own operational independence while managing to develop as a public company. Such concerns are made more understandable by the absence of effective deterrents in cyberspace and growing incidences of cyber attacks.

Last year, an estimated 2 million cyber attacks inflicted more than $45 billion in losses, and studies project $5.2 trillion in additional costs and revenue losses over the next five years. In lists of the world’s major cyber attack instigators, Russia emerges as the second-largest source of cyber attacks after China. Drastic increases in cyber threats have led to the White House allocating a record cyber security budget of $15 billion for this year.

Although Moscow and Washington might be working on establishing rules of engagement, tensions are not likely to abate anytime soon. Last year, the Trump administration accused the Russian government of targeting the US power grid and a New York Times report stated that the US military has increased its own attacks on Russia’s power grid. Such acts only complicate further perspectives for Russian businesses, simultaneously rendering them focuses of suspicion and hostages of geopolitical struggles.

Domestically, the situation for Russian companies is also unpredictable. Although tougher regulations helped boost internet companies to constitute about 4% of the Russian GDP while complicating work for mostly American competitors, some recent initiatives threaten to reverse the changes. The new “internet isolation” legislation that was adopted a few months ago, as well as recent draft legislation that obliges the linkage of email accounts to their mobile phone numbers could curtail growth and stifle innovations altogether.

The domestic environment forces Russian companies to learn how to navigate under growing state pressure during stagnating economic times.

Yandex, Russia’s largest internet company, claims to have 108 million monthly users. This is about 75% of Russia’s population. One reason it was able to challenge competitors was the company’s ability to comply with restrictive legislation and capitalize on Russian-language search capabilities, as Russian is the Internet’s second most spoken language.

Despite operating within restrictive frameworks, Yandex is also known for its rare stand against pressure from security services to hand over its encryption keys. Currently the company continues to expand its presence by boosting its e-commerce services and combining ride-sharing businesses in Russia and neighboring countries with Uber.

The company, however, still struggles with legislation and last week its shares tumbled by more than 3% after a draft law proposed limiting foreign ownership in Russian IT companies to 20%.

The example of Yandex might be an exception to the general rule. Previously Kaspersky Lab faced controversy over allegations of its connections with the Russian security services. According to a 2012 media report the company replaced high-level managers with people who enjoyed close ties to Russia’s intelligence services. Such changes in the course of development along with allegations of spying led to the Trump administration banning Kaspersky Lab from federal civilian and military computers, and ultimately shutting down the company’s access to the US market.

The Russian public has also grown more concerned about private data protection. Hackers recently breached a Russian intelligence contractor and found that it had been trying to crack the Tor browser and split its internet off from the rest of the world. Described by the BBC as possibly “the largest data leak in the history of Russian intelligence services,” it further aggravates already tense relations between state regulators and the Russian public.

Such concerns might contribute to a “brain drain” that increasingly affects IT businessmen, who strive to materialize ideas abroad and mute affiliations with their country of origin.

Russia has genuine potential to become a startup powerhouse. Russians were heavily involved in the early days of Internet giants Google and Facebook, Moscow has emerged as the number two city for fast-growing private companies, and IT entrepreneurs of Russian origin regularly appear in the US Forbes 30 Under 30 list. All of which lends optimism for the situation to improve in the foreseeable future. In the meantime, Russian IT businesses will continue to straddle both worlds and hope for change.