How Putin Crashed a Russian Internet Stock
With a few ill-chosen remarks, Russian President Vladimir Putin has crashed the share price of his country's largest Internet company, the Google-beating search engine company Yandex.
At the time of this writing, Yandex NV, the Dutch-registered parent company of Russia's search giant, was 16 percent down on Nasdaq. All Russian shares were doing badly because of the new escalation in eastern Ukraine, but Yandex, the country's technology blue chip, was worse off than others -- as if by presidential decree.
Speaking at a pro-Kremlin media congress on Thursday, Putin had declared that "at its dawn, the Internet emerged as a special project of the U.S. CIA and that's how it's developing." Then he explained how Yandex -- which in March had a 53.3 percent share of the Russian search market, compared with Google's 26.6 percent -- fit into this scheme of things.
"As far as Yandex is concerned, not all is so simple," he said. "When they started out, they too were pressured, told that they had to have so many Americans and so many Europeans in their governing bodies, remember that? And they had to agree with that." Putin went on: "And they are partly registered overseas, not only for tax reasons, but also out of other considerations."
In the context of Putin's description of the Internet as a U.S. intelligence tool, this sounded sinister, even though it was untrue. No one forced the company to appoint foreigners to its board. Ben Cole, the U.S. investor who was the company's original chairman, was among the first to back Yandex founder and current Chief Executive Officer Arkady Volozh, who always spoke of this with gratitude. Other early foreign backers, too, were after money rather than Russian secrets. They made plenty of it after Yandex went public in 2011: Charles Coleman III, of Tiger Global Management LLC, sold off his stake for a profit of more than $1 billion. As for the Dutch registration, it was Yandex's answer to Russia's imperfect corporate laws and an attempt to keep the company safe from political storms -- such as the one raging now.
On Friday, Yandex responded to Putin with a mild news release. It said the participation of international investors was normal for a tech startup and that, as a public company with a 70 percent free float, it was not being pressured by any of its shareholders. Yandex also reminded Putin that Russia was one of the few countries where local Internet companies were stronger than global ones, hinting that if the Internet was indeed a Central Intelligence Agency project, it was not working particularly well in Russia.
Whether that gentle reminder worked or not, the market took Putin's suspicion as a bad sign for Yandex. After all, if the country's president believes that no Internet company can avoid harmful U.S. influence, he will probably act on his conviction. Given Putin's growing unpredictability, showcased by the Ukraine crisis, the action may be drastic. As Yandex warned in the risks section of its latest 20-K: "Businesses in Russia, especially high-profile companies, may be subject to aggressive, arbitrary, contradictory or ambiguous laws or regulations."
The Russian parliament is considering legislation that could declare major Internet companies "strategic" for the same paranoid reasons that Putin mentioned Thursday. If some variation of this is passed, Yandex's foreign shareholders could be forced to sell their shares or face expropriation.
Yandex is a Russian company based on an ingenious proprietary code that is in some ways superior to Google's: Many Russians get more satisfactory search results from Yandex. It is also recording double-digit revenue and profit growth (37 percent and 34 percent, respectively, last year). Yet the company has had more than $1 billion shaved off its market cap by a single remark from an increasingly erratic dictator. Don't hold your breath for a retraction from Putin, though. Russia's president doesn't consider fallout from what he says to be his concern.
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