Web Offensive: Russia Battles Online Foes and Freedoms

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Innovative Russia Internet companies are waging a battle for market share against US competitors, such as Google and Facebook. But another battle is raging within the country itself -- between supporters of online freedom and politicians wary of how online services can help foment revolt.

Photo Gallery: Internet Worries and Success in Russia Photos
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The reserved Russian businessman who recently moved his team into a loft in London's Soho district, between the gay bars and esoterica stores, is driven by an ambitious goal: He wants to make his Internet startup the next Facebook, he says, "the next $100 billion company."

Born Andrey Vagnerovich Ogandzhanyants in the Soviet Union in the mid-1970s, he now goes by the name Andrey Andreyev, which is easier for investors to pronounce. From his offices in London, Andreyev oversees Badoo, a growing online-dating and social-networking site.

Badoo has over 3 million users in Germany and 157 million globally, with around 100,000 more joining each day. The site is half social network along the lines of Facebook and half dating service, with both website and smartphone app employing GPS to locate nearby users interested in getting a drink, flirting or even starting an affair.

Singles use Badoo to search for love, unfaithful spouses seek out adventure and prostitutes look for new clients. Andreyev's site serves the role of a nightclub, except that no one has to strip and dance on the bar to get attention here. Instead, users can pay a few euros to have their picture displayed to other users, a business model that has helped Badoo rake in $150 million (€122 million) in annual sales. Andreyev himself seems to follow the same communications policy as a pimp might -- he doesn't like to talk about his business.

Andreyev is a good example of both the successes and the problems faced by Russian Internet entrepreneurs, whose creativity and cool-headed pursuit of profit are stealing a share of the market away from American behemoths such as Google and Facebook -- and doing so with the Kremlin's blessing.

Ties with the Kremlin

Russian President Vladimir Putin, himself a former KGB agent, clearly enjoys seeing the same power dynamics play out in European cyberspace as once did in Europe itself. Just as Washington and Moscow divided the Continent into spheres of influence during the Cold War, today, American and Russian companies are battling for dominance of the Internet. Market research shows that 16 of the 20 most popular websites in Europe are American. Not one of those top 20 is German, French or British, while the remaining four are all Russian. Indeed, the IT boom is the Russian economy's most notable success since the fall of the Iron Curtain.

Putin has welcomed Russia's rise to become a major digital power, and he's happy to see Russian Internet companies chipping away at America's dominance. At home, though, Putin fears the Internet for its role as a place where resistance is fomented against his government. Within Russia, he keeps IT firms under the control of state-owned enterprises and a small circle of loyal oligarchs.

He also hastily implemented a controversial Internet law last week that the Kremlin pushed through the Duma, Russia's parliament in mid-July. The law forces Internet providers to use web filters, a new infrastructure that makes it possible to introduce a broad program of censorship at any time.

The law is part of Putin's push, three months after his return to the Kremlin, to put the rebellious Russian population back in its place. A trial began last Monday against members of the punk band Pussy Riot, who had sung protest songs against Putin in a church. And, last Tuesday, a public prosecutor brought charges against Russia's most famous blogger, Alexei Navalny, who may face a decade behind bars.

Given these circumstances, it's not all that surprising that people doing business in this environment tend to be cautious. Banker Alexander Mamut, said to be worth $2.1 billion and the owner of blogging platform Livejournal.com, which is popular in the US as well, avoids interviews as he is wary of overly political questions. Yuri Milner, a major investor with Facebook, prefers to talk about his oversees business deals rather than about his Russian online empire, the Mail.ru Group, whose pages are visited by around 70 percent of all Russian Internet users.

Milner's most important financial backer is Alisher Usmanov, Russia's wealthiest man with a fortune worth $18 billion. Usmanov's wife, Irina, coaches Russian Olympic rhythmic gymnasts. Usmanov owes his wealth to business deals in the gas and steel industries, but also to his political connections. In 2006, with Putin's blessing, Usmanov bought the newspaper publisher Kommersant, where he has been known to act directly in the Kremlin's interest. In December, when Kommersant's influential and independent-minded newsmagazine Vlast ("Power") printed an image of a ballot on which an angry voter had written "Putin, f… you!" in large red letters, Usmanov fired Kommersant's editor-in-chief the very same day.

Taking on the US Giants

Another major player in the Internet industry has its headquarters in a futuristic new building in downtown Moscow. Arkady Volozh, CEO of the search engine Yandex, has a panoramic view from his office, with the golden domes of the Kremlin glinting in the distance. The initial public offering of Volozh's search engine on Wall Street in 2011 raised $1.3 billion.

Yandex is the only comprehensive, global search index other than Google and Microsoft's Bing. This made it all the more important to the Russian government to ensure its influence over the search engine. Sberbank, the giant state-owned savings bank run by Putin's former economic minister German Gref, holds a so-called "golden share" in Yandex, which gives it the right to block any sale of more than 25 percent of the company. The Kremlin doesn't want the search engine to fall into foreign hands. The company is "of strategic importance," Volozh says, just like Gazprom, pipeline operators or telephone companies. Every day, 19 million Russians visit the Yandex site, which also displays news. This year, for the first time, the company reached more Russians than the country's biggest TV channel.

Yandex has 3,500 employees, nearly twice as many as it had just two years ago. With a 60 percent market share, the search engine is the market leader within Russia, outstripping Google. It hopes to show up the American giant elsewhere, as well. In Ukraine, for example, the Russian company has boosted its market share from 18 to 25 percent.

In September 2011, the company expanded beyond the borders of the former Eastern Bloc for the first time. Yandex hopes to win away up to 20 percent of Google's market volume in Turkey by drawing users with new functions, such as a search feature for Koran verses and traffic alerts for chronically congested Istanbul.

The new office on the Bosporus is meant to be a foothold for the leap into the global market. Yandex wants to take on countries in which Google holds sway and users are eager for alternatives to the Californian giant -- Brazil, Thailand, Poland and "Germany would fit as well," Volozh says. Yandex started feeling out the German market this June, initially as a partner of MetaGer.de, a search engine run by the University of Hanover. "Yandex has hits that Google would never find," MetaGer.de's Wolfgang Sander-Beuermann says in praising the Russian search engine.

Yandex makes $179 million in profit from $622 million in annual sales, roughly the same profit margin as the gas industry giant Gazprom, and the market is far from saturated. In the second quarter of 2012, profits saw a year-on-year growth of 76 percent.

Yandex's triumphal advance represents the success of Russia's new economy. "Runet," a term used to describe the Russian segment of the Internet, has long provided a place where IT pioneers, such as Volozh, could experiment largely undisturbed by competition from America. Amazon and eBay preferred to focus on financially strong markets in Europe and Asia, while Google found itself struggling with the Cyrillic alphabet and the pitfalls of Russian grammar.

Cracking Down on Online Dissent

Before moving to London, Andrey Andreyev created a Russian forerunner to Badoo in Moscow, as well as an online advertising company that Google was interested in buying for $140 million in 2008. The Kremlin nixed that deal, wanting "Runet" to remain Russian.

The Internet has become a significant power factor in Russia. Last year, the country overtook Germany as Europe's largest Internet nation, with 70 million people from Kaliningrad to Vladivostok surfing the net. When the Kremlin once again used fraud in parliamentary elections held in December, the opposition struck back online, posting videos that showed the manipulation taking place. State-run television hid the existence of these videos, but one clip -- showing a representative of Election Commission No. 2501 filling out ballot after ballot himself -- was viewed around 2 million times on Youtube.

One particular blogger left his mark on that election campaign. Lawyer Alexei Navalny, 35 at the time, leveled online accusations of corruption against politicians and high-level government employees, calling Putin's United Russia "a party of crooks and thieves." Navalny struck a nerve with voters fed up with corruption and cronyism. Despite ballot-rigging on a massive scale, United Russia lost 12 million voters, and its overall support dipped below 50 percent.

Putin's party has been out for revenge ever since. In late July, access to Navalny's website was blocked, supposedly by accident. Now the blogger must appear in court to defend himself against charges that he misappropriated public funds in 2009 while working as a governor's adviser. If convicted, Navalny faces up to 10 years in prison.

The general climate, both in Russia and online, has grown harsher since Putin took over the presidency from Dmitry Medvedev in May. As president, Medvedev liked to be photographed with an iPad in hand, he kept a blog and he presented himself in his Sunday speeches as the Internet's greatest protector.

As recently as December, Putin also lauded the Internet as "free and enormously democratic." But that was nothing more than campaign rhetoric. Since the beginning of August, the new Internet law has made it possible for authorities to block websites without a court order. The Kremlin officially says it wants to fight online child pornography. But the technology Russia's Internet providers are now acquiring resembles what censors from China's Communist Party use to block sites that don't toe the party line. This method, known as Deep Packet Inspection (DPI), makes it possible to block websites and to monitor chat programs, such as the one from popular provider ICQ.

Calls for Internet Freedom

The Kremlin's efforts to battle the Internet's influence are only fanning the flames of conflict with Russia's ambitious and increasingly confident IT sector. Yandex, for example, protested openly against the new law because it "does not fulfill the stated objective of protecting children, but can theoretically be misused."

In few other countries are social networks as influential as in Russia. Russian users spend an average of around 10 hours a month on such sites, nearly twice as much as the global average. Some hardliners call for shutting down Russia's largest Facebook clone, VKontakte.ru, on the grounds that it allegedly serves as a platform for child pornography. Security agencies dislike that the site provides Putin's opponents a forum for planning mass rallies. The Kremlin fears a scenario such as unfolded during the Arab Spring, when Facebook and Twitter became the demonstrators' most important channels of communication.

VKontakte has nearly 110 million users throughout Eastern Europe -- and a stubborn boss. With his pale features, Pavel Durov, 27, even looks a bit like Neo, the cyber-rebel from the "Matrix" trilogy. This winter, when the Federal Security Service (FSB), Russia's domestic security agency, demanded that Durov shut down certain forums in which tens of thousands of Russians were arranging to meet for massive demonstrations against electoral fraud, the head of VKontakte resisted publicly. "I don't know where this will end," he tweeted. "But we're still standing."

Durov must also proceed with caution since 40 percent of his social network belongs to Usmanov, the Internet magnate with the close ties to the Kremlin. Still, that hasn't stopped Durov from penning a manifesto that calls for Internet freedom -- and for high penalty taxes on oil and gas corporations, the economic pillars of Putin's system. Durov hopes this will help overcome the country's natural resource dependency. His manifesto reads like a declaration of war by the new Russia against the old one.

There's no way to predict how this trial of strength will turn out. As Julia Latynina, star commentator at the radio station Echo of Moscow, puts it: "Either the Internet will destroy Putin's regime or the regime will destroy the Internet."

Translated from the German by Ella Ornstein

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