Russia Internet Giant Risks Running Out of Vital Tech in a Year

Russia Internet Giant Risks Running Out of Vital Tech in a Year

Russia’s omnipresent tech company, which created products ranging from the country’s dominant search engine to its biggest ride-hail service, is facing a looming shortage of hardware as U.S. sanctions punish President Vladimir Putin for invading Ukraine. 

Yandex NV may run short of the semiconductors needed for the servers it uses to power its business within a year to 18 months because of import restrictions, two people with direct knowledge of the issue said, asking not to be identified in order to speak candidly. Sanctions on dual-use technology, which have both military and commercial uses, have hit its self-driving vehicle unit particularly hard, they said. 

A Yandex spokesperson didn’t immediately respond to requests for comment.

Yandex has plunged into crisis since Putin began the war Feb. 24, caught between the Kremlin’s increasingly harsh internet censorship and a backlash in its key foreign markets. The company’s international partnerships are crumbling, two board members resigned, and its number two executive, Tigran Khudaverdyan, was forced to step down after being sanctioned by the European Union. The company’s market value has slumped from a record $31 billion in November to $6.8 billion after the invasion began.

The EU said it targeted Khudaverdyan for attending a meeting at the Kremlin on the day of the invasion and because of the actions of Yandex’s news aggregator. The company has been criticized for suppressing independent news as it contends with Russian legislation that prohibits referring to the war as anything but a “special military operation” on penalty of fines and imprisonment for up to 15 years.

The costs of ignoring the Kremlin’s orders are steep. Russia banned the Facebook and Instagram services of Meta Platforms Inc. and labeled their activity as “extremist” after they refused to remove content. Alphabet Inc.’s Google has been moving staff out of Russia in preparation for a possible shutdown in the country.

Reduce Exposure

The potential lack of servers could affect everything from Yandex’s cloud business and search engine, to Yandex Music streaming service and Yandex Market online shop. This year, these businesses may be able to consolidate their positions among the domestic leaders in their segments during the coming slump that Bloomberg Economics forecasts will shave about 9% off of Russia’s GDP this year.  

Yandex is seeking to reincorporate as a partnership to reduce exposure to sanctions on its employees, although details of the new structure haven’t been fully worked out, according to the people. It’s also in talks with state-controlled VK, which runs Russia’s largest social network, to sell its news division and the company’s Zen social media platform, they said. 

Another option is spinning off the technology-intensive self-driving unit, they said. 

Yandex Self-Driving Group’s autonomous vehicles have driven over 10 million miles, with its taxi fleet gaining a foothold in the U.S. and its robots delivering food at a handful of U.S. college campuses. It halted U.S. operations, including a partnership with Grubhub, in March. 

Russia may be able to turn to China, a major microchip producer, for semiconductors and other tech hardware as part of efforts to soften the impact of sanctions. So far, however, China has shown little sign it’s willing to circumvent international sanctions even as it criticizes the measures as damaging to trade relations with its key diplomatic partner.

Enforce Sanctions

U.S. Commerce Secretary Gina Raimondo earlier this month vowed to vigorously enforce export controls on Russia and said the U.S. would be on guard against Chinese semiconductor companies that might try to get around the sanctions, though she said there’s no evidence so far that any are seeking to do so. 

Amid a widespread investor rejection of Russian companies in the wake of the invasion, Yandex’s shares in the U.S. have been frozen since early March. Russia’s Economy Ministry is working on a way to de-list depositary receipts of companies traded abroad, the Interfax news service reported Tuesday, citing a person familiar with the draft law that it didn’t identify.  

The company has hired advisers to help it navigate talks with bondholders after its U.S. shares were suspended, enabling investors to ask for repayment in full. It already said it doesn’t have the money to redeem the $1.25 billion bond, which is meant to be exchangeable for common stock.

Brain drain is another potentially complicating factor as Russian tech workers increasingly look to move abroad to escape the country’s deepening economic isolation.

Between 70,000 to 100,000 IT specialists may emigrate in April, Interfax reported last week, citing an estimate from the Russian Association for Electronic Communications. The group said that’s in addition to a first wave of 50,000 to 70,000 programmers who have already left the country. 

©2022 Bloomberg L.P.

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