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Q&A

There’s a Crisis Happening in the Russian Tech Industry

It’s been a brutal year for Russia, and next year may be worse for its citizens and the business community amid an economic recession and continued friction between its government and the West. There have also been a variety of shockwaves sent through the Russian tech industry, which doesn't get much attention in the West despite being the sixth-largest Internet market by number of users.

The latest came last week after Lamoda, a major Russian e-commerce player backed by Western investors—including Germany’s Rocket Internet, JPMorgan Chase and Summit Partners—had its Moscow office searched by law enforcement authorities for reasons that are still unclear. It’s not unusual in Vladimir Putin’s Russia, where a broad array of businesses live in fear of authorities shutting them down.

But Internet businesses, including those that offer their services globally, also are getting hit with a series of new data and tax laws. Starting in 2016, for instance, websites operating in Russia will be required to store data on servers located inside the country. Some non-Russian companies might find the costs and technical challenges onerous and decide to shut off access to Russian Internet users.

A growing number of companies are ditching the country, which hatched major tech concerns including search engine Yandex and Internet conglomerate Mail.ru. Instead, firms are heading to places like the Czech Republic and Lithuania. The Russian founder of Russia’s top social network and the Telegram messenger left the country in April. American software maker Adobe Systems also recently closed its Russia office.

Some American venture and private equity firms, including General Catalyst, Accel Partners and Tiger Global Management, have divested some of their Russian investments, signaling a broad retreat. Meanwhile, Russian venture firms are increasingly looking to invest elsewhere, following the lead of Digital Sky Technologies, which branched out to the U.S. years ago.

Misha Lyalin, who was born in Moscow, is living through the crisis. As the CEO of Zeptolab, a self-funded mobile game maker based in Russia that is one of the country’s best known tech startups, he is in an enviable position relative to many peers. His company’s games, such as Cut the Rope, are available globally and thus aren’t impacted by the dropping consumer spending levels domestically.

But the 40-year-old Mr. Lyalin, who manages nearly 100 employees in Moscow, most of them engineers, says he hasn’t ruled out leaving the country for more stable pastures. He recently spoke with The Information about the fearful and beleaguered tech scene in Russia and how this crisis also breeds opportunity. Edited excerpts below.

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Obviously it’s going to drop. When you look at Russia from the outside, and when you look at what Putin is doing and his face, you probably don’t want to invest. One thing you need to realize is it’s a big country, and the economy is still going to flourish. We have natural resources. People will make smart bets like in the 90s. Like the investment in Yandex. Think about how much those people made.

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