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Russia’s Tech Industry Is a Vibrant Oasis in a Dull Economy

Private companies are registering strong growth in e-retailing, online dating and software services.

Investors see little reason to get excited about most Russian stocks these days. The dollar-denominated Russian Trading System index has fallen 14 percent over the past year, more than the 9 percent decline in emerging markets generally. The country’s economic growth slowed to 1.3 percent annually in 2013, according to the World Bank, down from 3.4 percent in 2012. Russia’s own Ministry of Economic Development slashed long-term growth projections last November, to an average 2.5 percent a year between now and 2030.

Some Russian companies are immune to the prevailing pessimism, though. New York–traded shares of Yandex, the country’s dominant Internet search provider, have jumped by 60 percent in the 12 months ended February 26., which controls the leading Russian-language portal and 40 percent of, the local version of Facebook, gained 13 percent on the London Stock Exchange (LSE).

Two Russian-linked initial public offerings sizzled on U.S. markets during 2013. Shares in Qiwi, an electronic payments platform akin to PayPal, have doubled in price since the company launched its $213 million IPO on Nasdaq last May. So has the stock of Luxoft since it went public with a $70 million offering on the New York Stock Exchange in June. The company, which is domiciled in the British Virgin Islands and has its executive offices in Zug, Switzerland, is a subsidiary of Moscow software developer IBS Group. Tinkoff Credit Systems Bank, an Internet-only bank founded in 2006 that focuses on high-margin consumer loans in Russia, raised $1 billion in an IPO on the LSE in October through its parent, TCS Group Holding. Its shares have slumped 33 percent from the issue price, though.

The performance of these companies reflects the dynamism of Russia’s tech sector, which is developing rapidly, even as the country’s commodities-dependent economy stagnates.

The young Russian tech companies have convinced investors that they represent an island of sound international governance standards in the murky sea of Russian capitalism. The presence of Westerners as pre-IPO shareholders and executives — Tinkoff Credit’s CEO is Oliver Hughes, a U.K. national who joined the bank from Visa International — offers some reassurance. The firms’ founders all hail from a globally recognizable class of tech entrepreneurs who owe their success to vision and moxie, not to skill at manipulating opaque privatizations or fending off rival gangster clans.

President Vladimir Putin’s government, meddlesome as it is in natural resources and other so-called strategic sectors, has largely left the new economy to its own devices, except for occasional grants from the Skolkovo Foundation and a state-backed angel investor, Russian Venture Co., that is just finding its feet. “A lot of emerging-markets investors have been burnt by Russia, whether by Yukos [the oil company seized by the government] or some of the IPOs for state companies,” says Michael Calvey, founding partner of Moscow-based Baring Vostok Capital Management, which was an early investor in both Yandex and Tinkoff. “But companies like Yandex, Qiwi or Mail are pitching to global Internet investors who compare them to peers in China or Brazil.”

More Russian tech IPOs are in the pipeline for the next few years, Calvey predicts, driven by still-rapid growth in Internet usage in the country and the vast expanses of e-commerce real estate that remain unclaimed as a result. Only half the Russian population used the Internet once a month or more as of late 2012, according to a Yandex study. A maximum of 20 million Russians, out of a population of 143 million, currently shop online, according to Maëlle Gavet, CEO of Ozon, the online retailer that is the local equivalent of The company is one of Baring Vostok’s hot new prospects in the field, alongside, which is a sort of cross between EBay and Craigslist.

These homegrown sites are generally beating the global originals in the Russian market, which includes ex-Soviet neighbors where Russian is widely spoken and encompasses some 250 million consumers. A visit to Gavet, a Frenchwoman who first came to Russia to advise consumer goods companies for Boston Consulting Group, helps explain why.

The credit card infrastructure that drives’s business in developed markets is still spotty at best in Russia, compelling Ozon to deliver most of its wares for cash on delivery. That’s no small challenge, considering that Russia is the world’s largest country, with an expanse that stretches across nine time zones. The national postal service is feckless, and there are no private shippers on the order of United Parcel Service or Federal Express. So the company has had to build its own courier service and 2,000 pickup points across the country, a number that will soon grow to 4,000. “Amazon’s job ends when the product leaves their warehouse,” Gavet tells Institutional Investor in an interview in her office at Ozon’s headquarters, tucked into a residential courtyard in the tony north Moscow neighborhood of Sokol. “Ours just begins.”

The large expense of delivery leaves Ozon, founded in 2000, struggling for profitability even as sales jumped 55 percent in 2012, the latest period available, to $250 million, Gavet says. But a blue-chip roster of investors — including Intel Capital, the chipmaker’s venture capital arm; Cisco; and Japanese e-commerce power Rakuten — alongside Baring Vostok, is hanging on in expectation that the company will turn the corner. “We don’t want to do an IPO just for the sake of doing an IPO,” Gavet says coyly when asked when the company might go public.

There is plenty of activity at the start-up level in Russia, too. Across town from Ozon, in a five-story walk-up office building wedged between discount lingerie kiosks and shawarma stands behind the Savelovsky railway station, Andrey Burin is camped out on a dilapidated, sunken couch, plotting how to take dating site to the next level. He is surrounded by half a dozen shaggy young techies administering to the needs of the platform’s 500,000 or so users. Teamo trails the country’s largest online dating site,, which claims 20 million users, but Burin, who did his social networking apprenticeship working for Badoo in the U.K., wants to own the “serious relationship space,” as he puts it.

Teamo is one of 13 fledgling Internet companies bankrolled since 2010 by Fastlane Ventures, a $130 million venture capital fund based in Moscow, and one of only two of that cohort that is currently profitable. (Fastlane has had two exits as well.) Two floors away from Teamo, physician-turned-e-marketer Azamat Ulbashev is trying to nurse another Fastlane project, VitaPortal, to breakeven with content that mixes elements of WebMD and Weight Watchers. “We started out creating something like WebMD but found that users wanted an active service that would help them manage weight loss or diabetes,” he explains.

Marina Treshchova, Fastlane’s U.S.-educated CEO, says she and her colleagues look at more than 25,000 aspiring tech companies every year. “We see the same entrepreneurs coming back with a new business card the next month,” she quips. Fastlane employs strict criteria in winnowing this enormous herd: The business plan has to have worked already in developed markets. “The idea has to be proven elsewhere – that it can be executed and monetized,” Treshchova tells II.

Scorning such copycat enterprises is Dmitry Chikhachev, managing partner at Runa Capital, another Moscow-based VC that has invested $130 million in two dozen companies since its founding in 2009. Chikhachev, a seasoned executive whose last job was overseeing Russian casino operator Ritzio Entertainment Group’s expansion across Europe, created Runa with Serguei Beloussov, an old classmate from the Moscow Institute of Physics and Technology who himself has founded four different tech companies over the previous 15 years.

The two aim to conquer global markets using Russian and ex-Soviet brainpower, which has been a sort of holy grail for Russian techies since the dawn of the market era. They watched with no little embarrassment while underdeveloped India superseded Russia as a global technology center. But Runa’s roster of firms will help change all that, Chikhachev promises. “Russia is a very unique place as a source of engineering talent,” he says. “Russian engineers love to solve complex problems.”

One of the stars in Runa’s firmament is Jelastic, a Ukrainian-founded firm that provides middleware for Java and PHP software developers to adapt for cloud computing. Runa invested $500,000 in Jelastic at its founding in 2010. The company has since garnered additional funding from two other Russia-based funds, Almaz Capital and Maxfield Capital.

Chikhachev also has high hopes for Nginx, a designer of web site engines that counts Facebook, Amazon and Netflix among its clients. Moscow programmer Igor Sysoev created the Nginx system in 2002, and Nginx Inc. launched as a corporate entity in 2011 with $3 million from Runa and other VCs. The company raised an additional $10 million last October from investors including New Enterprise Associates, a Timonium, Maryland–based VC outfit. One more hot prospect is Ecwid, a company formed in the Volga River industrial city of Ulyanovsk that enables merchants to set up online stores with ease. Runa made the first outside investment in the firm, committing $1.5 million in 2011. The relatively small sums involved suggest the great bang for the buck potentially available in Russia tech’s sector, Chikhachev says. “Having $135 million in our fund is like having $300 million in Silicon Valley,” he boasts.

These Russian companies are not only selling to global markets; some have actually moved there, at least in part. Jelastic, Nginx and Ecwid all have their headquarters in Silicon Valley these days and have recruited managers with U.S. experience to serve as CEO or president. Their programing operations remain based in Russia and Ukraine, though.

A role model for this structure is Luxoft, which went public last year. Luxoft’s parent company, IBS Group, has been a pioneering software developer and systems integrator within Russia since the early 1990s. But co-founder and CEO Anatoly Karachinsky discovered he could design superior systems for international clients as well — starting with banks like Deutsche Bank and UBS and branching out to manufacturers like Ford Motor Co. IBS spun off the foreign business unit as Luxoft last year, but the brains trust remains proudly within Russia and its former satellites, Karachinsky declares. “We employ 10,000 programmers in Central and Eastern Europe,” he says. “The Communists did a lot of bad things, but they left a good education system.”

All of this private sector ferment has little interaction with government efforts to build up Russia’s tech industry. The state-backed Skolkovo Foundation, which is charged with creating a Russian Silicon Valley outside Moscow, has focused on luring global giants like Microsoft and Cisco into Russia. Rusnano Corp., an official investor backed with $10 billion in Kremlin funding, concentrates, as its name suggests, on nanotechnology and advanced materials, not software or e-commerce. But the state can lend a helping hand. Runa Capital’s Jelastic got a $1 million grant from the Skolkovo Foundation in 2012 for development of what it calls the Jelastic Private Cloud. Entrepreneurs see potential synergies with Russian Venture Co., a $1 billion entity created to make early-stage investment in both software and biotech companies. RVC CEO Igor Agamirzian is a respected former computer science professor who spent 10 years working for Microsoft in Russia.

For the most part, though, what the burgeoning Russian tech industry needs is for the Kremlin to stay out of its way.

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