If considered literally, the long list of “risk factors” published in Yandex’s IPO prospectus could terrify any reasonable investor.
The list starts with countless business risks. Yandex does not hide its strong vulnerability to variations of the advertising market: “We generate almost all of our revenues from advertising, which is cyclical in nature.”
Not only is Yandex aware of threats posed by competing search companies such as Google, it also acknowledges its indirect competition with social networks: “The popularity of [these sites] may also reflect a growing shift in the way in which people find information, get answers, and buy products, which may create additional competition to attract users.”
Moreover, “as the Internet evolves, an increasing amount of online content may be held in closed social networks or stored in proprietary document formats, which may limit the effectiveness of our search technology.”
In the legal field, Yandex excludes neither the possibility of “intellectual property infringement claims” nor the possibility of “claims from its current or former employees for copyright-related matters,” among others.
In the technical field, the company acknowledges its vulnerability to “discontinued development and maintenance of the Internet infrastructure.” Yandex could also suffer from initiatives by index spammers or attacks by virus makers. Major threats could come from the inside: how can Yandex be certain of avoiding “systems failures or human errors?”
Yandex also seems fully aware of HR challenges: it could suffer from “the loss of any of our key personnel or [from] a failure to attract, retain, and motivate qualified personnel.”
The list also includes such general threats as possible fluctuations in economic conditions, inflation, and currency exchange rates, as well as unfavorable evolution of the legal framework.
A lawyers’ list of horrors
To a large extent, this frightful prospectus — obviously prepared by cautious U.S. lawyers — could equally apply to any important Internet search company or even, in certain parts, to any company.
More noticeable in the list is what specifically relates to Yandex and its particular Russian context. Important, too, may be what the list does not mention.
Regarding Russian specificities, the prospectus mentions not merely commonplaces such as the fact that “emerging markets, such as Russia, are generally subject to greater risks than more developed markets.”
The prospectus also boldly declares that “businesses in Russia, especially high-profile companies, may be subject to aggressive application of contradictory or ambiguous laws or regulations, or to politically motivated actions.”
“Many commercial laws and regulations in Russia are relatively new and have been subject to limited interpretation. As a result, their application can be unpredictable. In addition, government authorities have a high degree of discretion in Russia and have at times exercised their discretion in ways that may be perceived as selective or arbitrary, and sometimes in a manner that is seen as being influenced by political or commercial considerations,” the document continues. “We cannot assure you that regulators, judicial authorities, or third parties will not challenge our compliance with applicable laws, decrees, and regulations.”
The RosPil scandal
Such a threat evidently materialized just weeks ago in what has been one of Russia’s most serious personal-data-leak scandals. In April, FSB, the Russian federal security service, formally demanded that Yandex disclose the identity of people who had used Yandex.Money to send financial support to RosPil, a sort of Russian WikiLeaks aimed at exposing corruption issues at the highest level.
Yandex had to comply, but since then, the data appears to have been leaked or misused by FSB: several users have complained they were intimidated as a result of their support.
RosPil founder Alexey Navalny, a lawyer, explicitly shifted the blame from Yandex to FSB. The company could not refuse to answer the official request it received, he explained to Forbes.ru. “When we opened a Yandex.Money account to collect money, [Yandex] warned us that the data could be disclosed to authorities upon official request in writing. But even if FSB invented some formal ground for such a request, what remains absolutely illegal and scandalous is that [FSB] transmitted personal data to members of Nashi [the Kremlin-friendly youth movement], who then called donors on the phone with obscure objectives.”
Could the government take control of Yandex?
Another risk noted by Yandex is that “businesses in Russia can be subject to aggressive actions by well-funded, well-connected financial groups and so-called “oligarchs” seeking to obtain control through the exercise of economic or political influence or government connections.”
The sentence appears to describe what actually happened to Yandex in 2008 when Alisher Usmanov, the Kremlin-connected oligarch who later backed DST, failed to acquire a 10% stake in the company. Although it has not been proven that the move was politically motivated, some observers saw in it a sign of government interest in a strategic Internet asset.
One year later, the acquisition of a golden share by Sberbank, which provided the national savings bank with veto power on the sale of more than 25% of the shares, seemed to confirm that the Russian government regarded Yandex as a sensitive asset.
However, the Kremlin’s indirect control over Yandex’s shareholder structure has not prevented the company from successfully developing its services and increasing its audience and profit over the last years – activities it is likely to continue in the foreseeable future.
Should Yandex’s business experience an actual threat from the government’s ambitions, this could take another form. Russian authorities openly consider creating a more controlled national search engine. Last March, Russian president Dmitry Medvedev was reported as lamenting the fact that while Google and Yandex are vast archives for storing everyday user-generated “art,” the organization of this information is a “complete mess” and needs to be “channeled to a more civilized place.”
“We have devoted a lot of time to debate about whether Russia needs its own search engine or not. Now, work on this project continues,” the President said.
For the moment, however, the threat is remote. First, it is not clear whether such a search engine would really compete with Yandex or merely be used for the needs of public authorities. Second, the project is far from being complete—or even, perhaps, from truly being started. In March, a source inside the Ministry of Communications and Mass Media, responding to the question posed by CNews.ru, said that the Ministry was “unaware of the status of the project.”
Still, should such a search engine be launched, “it could create additional competition for our search service, and could benefit from favorable governmental subsidies and other benefits and preferences not available to [Yandex],” the IPO prospectus says.
Yandex News: Technically neutral or politically engaged?
Yandex also states that its news service, which aggregates third-party content without regard to viewpoint, may nevertheless be “perceived as reflecting a political viewpoint or agenda,” which in turn could “subject [Yandex] to politically motivated actions.”
This last example of politically motivated threats sounds unconvincing, at least for the moment. In contrast with more tightened television and press, the Russian Internet has remained to date “a relatively uncensored platform for public debate and the expression of political opinion,” as U.S. watchdog Freedom House put it recently, and it is hard to imagine Russian authorities shutting down Yandex News for relaying politically touchy news materials from third-party sites.
However, with the election cycle approaching (legislative election in late 2011, presidential election in March 2012), one can expect Russian politicians to pay more attention to the Internet, and some political pressure cannot be ruled out.
