The economic environment in Russia has deteriorated sharply over the last 12 months, with the global oil price and the Rouble/Dollar exchange rate both collapsing by more than 50% and local interest rates spiking above 15%.
Like in 2009, this has caused a decline in consumer demand overall and a sharp cyclical downturn in investment-sensitive sectors such as construction and automobiles. Economic sanctions arising from the conflict in Ukraine also limit the access of large Russian companies to international financial markets, exacerbating the downturn.
But similar to previous crises in Russia, some sectors are still growing rapidly and taking a larger share of the economy. One example is internet services, where strong secular trends continue to drive growth and the crisis may actually be helping companies to attract customers faster from traditional competitors. The 10 internet services or e-commerce companies owned by Baring Vostok’s funds grew on average by 35% in the first half of 2015 compared to the same period in 2014, only slightly below their growth rates in prior years despite a contraction of Russia’s GDP in 2015 by 3.4%.
Clearly, IT and internet services companies are growing rapidly in all countries due to increasing penetration of broadband internet, mobile and other connected devices, and more active use of data in all areas of our lives. However, there are very few countries which are not dominated by global players like Google, Amazon, and Facebook, and yet the leading players in Russian internet and e-commerce are local companies. What is behind this?
Many foreigners assume that the domination of Russian internet companies is a result of strict regulation similar to that in China. The reality however is different. Until recently, internet in Russia was mostly unregulated and more liberal even than many developed markets in terms of limitations on foreign investment, so all major global internet players have already been present in Russia for several years. The recent Russian laws on copyright, the “right to be forgotten” and others have been widely criticized (and in many cases rightfully so) but Russian legislators are still mostly copying European regulation in these areas.
The real reasons for the dominance of Russian internet and IT companies are different. First, the Russian domestic market is sufficiently large to provide a critical mass for establishing a successful business just providing services in Russia. It is the largest market in Europe by the number of internet users, and had the largest size retail market in Europe at least before the 2014 devaluation.
The second factor is the quality and creativity of Russian software programmers and mathematicians. Despite many flaws, the Russian education system is still one of the best in the world in math, physics and software programming. The strongest young graduates from Russia’s leading institutions are actively recruited now by global technology players, but the largest share of them are joining Russia’s leading IT and internet services companies because they give them the opportunity to participate in creating great businesses and products rarely available in other places.
Exploiting these trends, several home-grown Russian success stories like Yandex, VKontakte, Mail.ru and Ozon.ru emerged in the 2000’s and became the dominant players in their segments despite open and intense competition with global giants like Google, Alibaba and Facebook. Now we are seeing a new generation of innovative Russian companies emerging in different segments of online, social and mobile services; companies like Avito, a leader in general, auto and real estate classifieds; Gett, an online taxi aggregator; Profi, a marketplace for professional services from tutoring to home renovations; Carprice, an online car buying and auction company; and many others.
There are well-known challenges to doing business in Russia – corruption, the under-developed judicial system, an inefficient banking system, and many others. However, all of this does not stop the energy, bold ideas and sense of humor of the best Russian businessmen. Indeed, the regular crises and unpredictability of the market may actually have contributed to the resilience and creativity of entrepreneurs in solving impossible problems.