How Russia Ran Off Investors and Killed Its Promising Tech Sector

In the first decades of the 21st century, Russia was considered a tech haven. Its emphasis on math and engineering had fostered a huge cadre of skilled professionals whose brilliance - even under tight government controls - attracted western venture capital. In the realms of hacking and cyberwar, Russia was believed to be the world's leader.

But even before its invasion of Ukraine, endemic corruption and government interference were causing an exodus of tech's most valuable resource, human capital. Since then, estimates suggest that most tech professionals who can leave have done so, denuding the sector. Sanctions have caused imports of key components to plummet and investors have pulled out. And given that half a million or more Russians have emigrated due to the war, there are concerns that Russia no longer has enough users from which to support domestic companies. In its greed and need for control, the Kremlin has only succeeded in destroying what was once its economy's strongest pillar. JL

Masha Borak reports in MIT Technology Review:

After the (Ukraine) invasion, Russia saw a mass exodus of IT workers. About 100,000 IT specialists left Russia in 2022, likely an underestimate. IT was responsible for a third of the growth in GDP. Tech was one of the few sectors where people could succeed on merit instead of connections. Russian entrepreneurs won international funding and made deals all over the world. (But) even (pre-war), ventures struggled, "constrained by corruption and inefficiencies," restrictive laws, arresting social media users, demanding user data, and content filtering. By 2025 the shortfall of digital workers could reach 1 million. More founders of “unicorn” startups leave Russia than any other country. “The knowledge is not there. There’s no human capital.”

Seven days after the invasion of Ukraine, Vladimir Belugin packed up his and his family’s belongings, canceled the lease on his apartment in Moscow, withdrew his kids from kindergarten, and started a new life outside of Russia. Not long after that, he resigned from his position as chief commercial officer for search at Yandex, Russia’s equivalent to Google and the country’s largest technology company. The war meant that everything would change in Russia, both for him and for his company, Belugin said from his new home in Cyprus: “You have to accept the new rules of having no rules at all in Russia.” 

Belugin was far from the only tech worker to leave. In the months after the invasion began, Russia saw a mass exodus of IT workers. According to government figures, about 100,000 IT specialists left Russia in 2022, or some 10% of the tech workforce—a number that is likely an underestimate. Alongside those exits, more than 1,000 foreign firms curtailed their operations in the country, driven in part by the broadest sanctions ever to be imposed on a major economy. 

It has now been over a year since the full-scale invasion of Ukraine began, with more than 8,300 recorded civilian deaths and counting. The tech workers who left everything behind to flee Russia warn that the country is well on its way to becoming a village: cut off from the global tech industry, research, funding, scientific exchanges, and critical components. Meanwhile Yandex, one of its biggest tech successes, has begun fragmenting, selling off lucrative businesses to VKontakte (VK), a competitor controlled by state-owned companies.

“It felt like my country was stolen from me,” says Igor, an executive at VK who has family in Russia and asked that his name be changed so he could talk openly. When the war began, he says, he felt as if 20 years of Russia’s future had been taken away in a heartbeat.

 

In Russia, technology was one of the few sectors where people felt they could succeed on merit instead of connections. The industry also maintained a spirit of openness: Russian entrepreneurs won international funding and made deals all over the world. For a time, the Kremlin seemed to embrace this openness too, inviting international companies to invest in Russia. 

But cracks in Russia’s tech industry started appearing well before the war. For more than a decade, the government has attempted to put Russia’s internet and its most powerful tech companies in a tight grip, threatening an industry that once promised to bring the country into the future. Experts MIT Technology Review spoke with say Russia’s war against Ukraine only accelerated the damage that was already being done, further pushing the country’s biggest tech companies into isolation and chaos and corralling its citizens into its tightly controlled domestic internet, where news comes from official government sources and free speech is severely curtailed.

“The Russian leadership chose a completely different path of development for the country,” says Ruben Enikolopov, assistant professor at the Barcelona School of Economics and former rector of Russia’s New Economic School. Isolation became a strategic choice, he says.

The tech industry was not Russia’s biggest, but it was one of the main drivers of the economy, says Enikolopov. Between 2015 and 2021, the IT sector in Russia was responsible for more than a third of the growth in the country’s GDP, reaching 3.7 trillion rubles ($47.8 billion) in 2021. Even though that constituted just 3.2% of total GDP, Enikolopov says that as the tech industry falls behind, Russia’s economy will stagnate. “I think this is probably one of the biggest blows to future economic growth in Russia,” he says. 

The departures begin

The mood was tense in the red brick and glass-lined Yandex office in south Moscow on February 24, 2022, the day the Russian invasion of Ukraine began. Anastasiia Diuzharden, then head of content marketing at Yandex Business, was there—as were a number of others—but she says she saw few people working. The building’s smoking area had five times more people than usual. Some employees left the country that same day.

As the news of the invasion circulated around the office, Diuzharden and her colleagues were called into a “khural,” a weekly meeting. There, she says, Tigran Khudaverdyan, Yandex’s executive director and deputy CEO, reassured them that the company would continue working. 

Yandex cofounder Arkady Volozh left the company in June 2022, after he was sanctioned by the EU.

ALEXANDER MIRIDONOV/KOMMERSANT/SIPA USA VIA AP IMAGES

Yandex was a company that inspired pride in Russia. It operated globally, with one part of the company registered in the Netherlands. Its engineers successfully competed with American companies: Yandex had nabbed a bigger share of the Russian search market than Google and offered a suite of 90 services that dominate much of Russia’s digital world. Among them were its lucrative content platform Zen and news aggregation platform Yandex News, where many Russians start the day online. But these information streams were also the source of its troubles.

In the weeks after Russia invaded Ukraine, a record 14 million people a day headed to Yandex News. But instead of reading about civilian deaths and destruction, they were told that Russian liberators were “denazifying” Ukraine. Some 70% of the information on Yandex News was coming from state-controlled media sources pushing propaganda—the result of a decade-long state crackdown on Russian independent media, including new post-invasion laws on permissible media sources. 

Diuzharden knew that the company would have to tread lightly to survive. “If Yandex made any [antiwar] statements, it could mean the end of this company,” she says.

But Yandex’s compliance had a cost. Three weeks after the invasion, Khudaverdyan was sanctioned by the EU for hiding information about the war from the public and stepped down from his role. Four days later, Yandex shares were stopped from trading on Nasdaq.

In June, Arkady Volozh, the company’s Israel-based CEO, was also sanctioned and stepped down, but not before reassuring staff that the company had prepared emergency funds for them: “We always knew in which country we live,” Diuzharden recalls him saying.

Former employees estimate that as many as a third left the country in just the first two months after the invasion (many continue to work for the company remotely). Diuzharden, who has family in Ukraine, left Russia in June. On her last day at work in the country, at the office overlooking the Moskva River, she estimated that only around 10% of the usual staff was there.

In the wake of these changes, Yandex hatched a plan to distance itself from its news and content platforms by selling them to VK. In return, Yandex acquired VK’s food delivery service. The deal was completed in September.

Then, nine months after the invasion began, Yandex announced it would cease to exist in its original form. By this summer, the company will be split into two parts: a Russian component and another owned by its former parent company, headquartered in the Netherlands. The Russian portion, which maintains control of the company’s core businesses, is set to be taken over by a special management partnership composed of three Yandex leaders and the Putin-aligned economist Alexei Kudrin.

Yandex’s long-term prospects are now bleak, say former employees. Within Russia, the once progressive company will have to continue cooperating with the government. Outside the country, it has struggled to build its business. “I think there is no future,” says Belugin.

Yandex did not comment on those sentiments. The company told MIT Technology Review that it has increased its headcount despite the challenging year and has beat its revenue targets for 2022. The company also stated that it’s working on expanding its international business.

The government’s expanding grasp 

Yandex is just the latest example in the Kremlin’s long history of trying to take control of Russia’s tech companies, fearing what might result from the population’s unfettered access to information online. These efforts date to 2011, when Facebook and Twitter helped spark the largest antigovernment protests in the country since the 1990s. 

Some in the tech industry joined the protests, hoping to help put Russia on a more liberal, democratic path. Igor says he was one of them. But he gave up on protests after a few years. “It felt hopeless,” he says. 

In the ensuing years, Russia imposed increasingly restrictive laws, arresting social media users over posts, demanding access to user data, and introducing content filtering. This put pressure on both Western social platforms such as Facebook, Twitter, and LinkedIn (which has been blocked in Russia since 2016) and their domestic counterparts.

VKontakte, often described as Russia’s Facebook, was “de facto nationalized” after its founder, Pavel Durov, was squeezed out of the company in 2014 and Kremlin-aligned oligarchs assumed control, says Enikolopov. After fleeing the country, Durov, who would later go on to create the messaging app Telegram, described Russia as “incompatible with Internet business.” According to a study from the National Research University Higher School of Economics, more founders of “unicorn” startups leave Russia than any other country.

The Russian government thought it should control everything, says Enikolopov: “Tech companies could not be left alone.”

The dawn of RuNet

After international sanctions were imposed on Russia following its annexation of Crimea in 2014, the Russian government started promoting the idea of its own sovereign internet, the RuNet. 

The war with Ukraine and the consequent sanctions have given new life to the concept. In March 2022, the Kremlin blocked access to foreign social media platforms such as Instagram, Facebook, and Twitter, a move that helped keep Russians in an information-controlled bubble. 

The country has worked to replace such popular international sites with domestic versions. To take the place of Google Play and the Apple AppStore, VK, together with the Ministry of Digital Development, launched a domestic app store called RuStore. TikTok, Instagram, and YouTube have homemade analogues such as Yappy, Rossgram, and RuTube.

Yandex News will play a part in consolidating state control over the content Russian users can read, eventually merging with other VK news products, according to Igor. 

“The main focus of VK is spreading propaganda,” Igor says, adding that this goal will be achieved by focusing the attention of Russian users on Russian services. VK did not respond to a request for comment.

Controlling online content is not the only way Russia wants to exercise digital sovereignty. After sanctions were introduced last year, the state started urgently promoting the goal of building up an entire self-contained tech ecosystem, encompassing everything from services and financing to hardware and supply chains. 

The Russian government has promised “unprecedented financing” for its electronics industry, potentially amounting to more than 3.19 trillion rubles ($41.2 billion) by 2030. But building that sector will be a challenging game of catch-up: even the government’s own estimates place Russia’s chip industry 10 to 15 years behind the rest of the world. Before the sanctions, Russia imported some $19 billion worth of high-tech goods annually, with the largest share of those imports (66%) coming from the EU and US, according to the Brussels-based think tank Bruegel. Experts such as Heli Simola, a senior economist at the Bank of Finland, estimate that imports of technology goods have dropped 30% since last year.

“Russia is not a terribly sophisticated economy in many ways, meaning that they don’t have a lot of high-tech industries,” says Niclas Poitiers, a research fellow at Bruegel. “In many sectors, industrial production has plummeted.”

Because of trade restrictions, Russia has also lost access to products from a range of leading companies, including Cisco, SAP, Oracle, IBM, TSMC, Nokia, Ericsson, and Samsung.

Poitiers says Russia’s move to rebuild tech businesses without conventional international exchange is a throwback to the Soviet Union. But today’s Russia is more likely to rely on chip smugglers and partners like China than to go it truly alone. “The knowledge is not there anymore. There’s no human capital,” he says.

The decline of Skolkovo

Well before the invasion of Ukraine, the Russian government made efforts to strengthen its technology ecosystems with special projects. Rosnano, a state-run nanotech company that the government is now considering disbanding, was one. But the most significant was Skolkovo, a high-tech hub that was an attempt to re-create Silicon Valley.

Even in normal times, such ventures struggled, says Adrien Henni, a venture capital investor and cofounder of the tech industry website East-West Digital News. “There were some praiseworthy efforts,” Henni says. “But these efforts were constrained by corruption and inefficiencies—and, more generally speaking, by the fact that overall, this is a regime that didn’t care.”

Skolkovo, which launched in 2010, was part of a modernization program initiated by then president Dmitry Medvedev, who projected an image of a young, digitally savvy, and Western-oriented technocrat. Located in the southwest of Moscow, less than a 30-minute drive from the Kremlin, Skolkovo looks like a slick technology park anywhere in the world. The dream was that it would become a launching pad for Russia’s tech entrepreneurs, offering grants, education, and office space. 

There was a steep learning curve. “The word ‘startup’ wasn’t in the Russian language at all,” says Alexey Sitnikov, vice president of communications and community development of the technopark’s university, the Skolkovo Institute of Science and Technology, known as Skoltech. 

But Western tech executives and venture capitalists heeded the call. The heads of Google, Intel, Nokia, and Siemens joined Skolkovo’s councils and boards. MIT signed a cooperation deal to help create Skoltech, attracting controversy and the attention of the FBI. (MIT terminated its relationship with Skoltech in February 2022 after the invasion began.)

By Medvedev’s side was Ilya Ponomarev, a member of the opposition in the State Duma and an advisor to the president of the Skolkovo Foundation, Viktor Vekselberg. He was tasked with spearheading the establishment of technology parks across the country.

“Skolkovo was the evolution of that idea, the crown jewel in that network,” says Ponomarev.

Ponomarev did not last long in Skolkovo. In 2011, the year after it launched, he became one of the leaders of Russia’s antigovernment protests and was soon hit with accusations of misappropriating Skolkovo’s funds. Four years later, after he became the only State Duma deputy to vote against the annexation of Crimea, the state charged him with embezzlement. Ponomarev found himself locked out of his bank accounts and stranded in the US, barred from reentering Russia. He claims that the charge is political. In 2019 he became a Ukrainian citizen, and he is now rallying Russians to overthrow Putin—by violence if necessary. The work that he and his colleagues were doing in Skolkovo and on the wider entrepreneurship ecosystem is now “wasted,” he says.

“Everything that is linked to entrepreneurship and venture capital is something where you need a lot of international operation and participation, and you can’t constrain this to one country. That’s exactly what happened in Russia,” Ponomarev says. 

Skolkovo hosted a growing number of successful Russian startups. But after the war started, many international collaborators abandoned the tech park. More important, foreign venture capital is staying away. In 2022, venture capital investment into Russian companies fell by 57%,  to $1.1 billion.

Medvedev announced in December that Skolkovo will “reformat its activities” in light of the challenges brought by sanctions. It is now helping dole out some of the government funds aimed at pushing the Russian tech sector toward self-sufficiency. In February Skolkovo was put under US sanctions. Sitnikov and other leaders in Russia’s tech clusters, such as Irina Travina, the chairman of the board of IT association SibAcademSoft in Novosibirsk, believe that Russian companies will continue to thrive in Russia by cooperating with other markets outside the NATO sphere, such as those in Asia, Latin America, and the Middle East. 

An uncertain return

But it is difficult to predict what the future holds for the Russian tech sector. 

Since the start of the war, the country has seen a wave of mergers and acquisitions as foreign firms have rushed to exit the market, often selling their assets to Russian competitors for low prices. One such asset was Avito, the most popular classified advertising site in Russia and the biggest in the world: in October, a subsidiary of the South African firm Naspers sold it for $2.46 billion, a fraction of its estimated $6 billion value, in order to leave Russia. The same subsidiary has also sold its stake in VKontakte. These fire sales could hand the Kremlin even more control over the tech sector.

The Russian economy did better than expected during 2022, with some tech companies, including Yandex, benefiting from the departure of their competitors. But many of the economists, tech entrepreneurs, and IT workers I spoke with believe that these gains might be short-lived. Russia’s military occupation of Ukraine has no end in sight, with three-quarters of Russians still saying they support the war.

One concern is that there may not be enough Russian users to sustain the country’s current digital industry. Another is that many tech workers have left for other countries, including Kazakhstan, Georgia, Armenia, and Turkey.

Russia hopes to persuade these workers to return. In November, a billboard on New York’s Times Square showed a plane flying through bright blue skies and flashed a message in Russian: “It’s time to go home!”

The ad was inviting tech workers to the Alabuga special economic zone, located in Russia’s Republic of Tatarstan. But for now, IT workers do not seem to be heading back. Russia was already struggling with a lack of talent before the war. A Gartner report published in late 2021, before the war, said that by 2025 the shortfall of skilled digital workers could increase 50% reaching up to 1 million professionals. 

The Alabuga special economic zone in Russia's Republic of Tatarstan has offered infrastructure and tax incentives for businesses and developers.

ALABUGA.RU

Despite the looming retention problem, the government announced cuts in September to a 21.5 billion ruble ($277.2 million) incentive program designed to support the tech industry and keep IT specialists in Russia. 

Several high-profile figures have renounced their Russian citizenship since the war, including the billionaire tech investor Yuri Milner and Oleg Tinkov, founder of the online bank Tinkoff. Many others have kept quiet, silenced by the potential consequences of raising their voices.

Diuzharden now lives in Belgrade, Serbia, a country where many Russian IT workers have relocated thanks to favorable visa conditions. She is not sure when she will be able to visit her hometown of Magdan in northeast Russia, eight hours by plane from Moscow. Many of her friends who left the country want to come back, Diuzharden says.

“I’m ready to come back to Russia, but under certain conditions,” she says. “I don’t want to live in a country where Putin is the president. I don’t want to live in a country that starts wars.”