This analysis was first published in SvD Näringsliv, in Swedish, on April 1st, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.
Arkady Volozh could have become Europe’s leading challenger to America’s tech icons. Instead he and his Yandex are isolated together with the rest of Russian industry. A deep dive into the biggest tech giant most people have never heard of.
It was Arkady Volozh’s birthday — February 11th of this year, 2022. He was about to get a nice present: real international recognition as an entrepreneur.
The magazine Wired was coming to do a profile of him and his internet giant Yandex — often described as “the Russian Google”.
They were going to meet in Tel Aviv, where Yandex has a research and development office. Volozh and the journalist talked on the phone to sort out the logistics. Volozh was in a good mood and offered to take Wired on some sightseeing on top of the interview.
Less than two weeks later, Russia invaded Ukraine.
The Yandex press contact got in touch to postpone the meeting, to a time when “the situation allows”. The profile ran anyway, but without the interview.
The risk is that the situation may never allow it. Because the tech giant Yandex has once again become a piece in the political game Volozh has tried to avoid his entire career. As the Wired article’s lede put it:
“It took Arkady Volozh 20 years to build Yandex into Russia’s answer to Google, Uber, Spotify, and Amazon rolled into one. It took 20 days for it all to fall apart.”
But let’s take it from the start.
Yandex began as a search program back in 1993. The name is short for “Yet Another Indexer”. Four years later, the company launched its first search engine on the internet — a year before American Google did the same.
The similarities between the two companies are many, and it’s a story that comes up often.
Sergey Brin — one of Google’s two founders — is also Russian, but moved to the US east coast in 1979 as a six-year-old. Volozh stayed in what was then the Soviet Union and met his co-founder, Ilya Segalovich, at university. Together they started a string of internet-related projects before finally landing on the search engine. In September 1997, Yandex could search the whole Russian internet — all 5,000 sites, at the time.
The success attracted interest from abroad too. Volozh and Segalovich secured a $5 million investment from the private equity firm Baring Vostok, founded by the American Michael Calvey. The money allowed the company to keep developing despite modest revenue. Calvey went on to become a well-known investor in Russian internet businesses, with the Swedish-led classifieds site Avito and the e-commerce company Ozon in his portfolio, among others.
The business model was the same then as now — contextual advertising. You search for something and ads appear related to your search results. Today this is standard on the web, but it was a big innovation in 1998. It’s how Google, YouTube, and to some extent Facebook make most of their money today.
By 2003, Yandex’s rise had reached Google in a more formal way, and Sergey Brin and Larry Page flew to Moscow with a large cheque in their pocket. They wanted to buy the company for $100 million. That way they could secure the Russian search market.
Volozh and Segalovich considered the offer but decided in the end to continue on their own. That turned out to be a good move. Google chose to enter Russia on its own later that same year, but would struggle to dominate the Russian market as easily as it had in other countries. A highly unusual development for Google, which holds around 85 percent market share worldwide.
There are two main reasons for Yandex’s success in Russia, and why Google hasn’t managed to catch up there.
The first is that Google — despite Brin’s Russian background — may have underestimated the complexity of the Russian language. Many Russian words can take many different endings depending on the grammar of the sentence, which makes indexing more complicated. On top of that comes the Cyrillic alphabet, which is adapted for Slavic languages.
Yandex understood that even people without a Cyrillic keyboard — including the estimated 20–30 million Russians living outside the country — would want to do searches. To handle this they use something called “CrazyFont”, which can best be described as phonetic Russian, written in the Latin alphabet. You simply write Russian the way it would sound in regular letters, and Yandex interprets it as Cyrillic Russian in the search. An innovation, and an example of Yandex’s inventiveness.
The second reason Yandex has done so well in Russia is more fraught. It concerns the link to the Russian state, and more specifically to Vladimir Putin.
Volozh always tried to keep political questions away from both himself and the company, even when they went against his own values. He’s described by colleagues in the Wired piece as a liberal pragmatist, but one who often went too far to appease the political environment around him.
Co-founder Segalovich, by contrast, was more outspoken. He took part, for example, in the protests against the results of the 2011 parliamentary elections alongside other employees. A former manager at Yandex, Lev Gershenzon, described how Segalovich set the company’s “moral standard”.
The different positions of the co-founders can partly be explained by their roles at the company. Segalovich was CTO — a primarily internal role focused on organisation and product development. Volozh is CEO, which in a Russian context means quite a few political entanglements for a company of this size.
“When good people do business with terrible people, they start trying to understand them. It’s like a disease,” Gershenzon told Wired.
The otherwise neutral Volozh had, out of necessity, started getting closer and closer to the Russian state.
Business continued to go well, though. Yandex had launched its music service — a sort of Russian version of Spotify — and was heading toward its next big milestone: an IPO in New York in May 2011. On the first day of trading on Nasdaq the stock went up 55 percent, which the New York Times described as a possible sign of a bubble in the tech sector. The bubble largely failed to materialise, but further down in the same article there was a more accurate analysis of what the future would reveal.
“The company faces significant political risk […] tight state control of political news may intensify as internet use grows.”
Segalovich was diagnosed with stomach cancer in 2012 and died the following year, just 48 years old. Volozh took the news hard, and the absence of his co-founder would go on to complicate his job further. With Segalovich — the man who embodied the company’s “moral standard” — gone, Volozh was left alone to face an ever-growing political pressure in the years that followed.
This time, with a more personal sender.
In Bloomberg, journalist Leonid Bershidsky wrote:
“With a few words, Russian president Vladimir Putin crashed Russia’s best internet stock.”
Putin had spoken specifically about Yandex at a media congress. The Russian president was, according to Bloomberg, blunt:
“When it comes to Yandex, it’s not as simple. When they started, they were under too much pressure to have a lot of Americans and Europeans in their controlling bodies — remember that? They’re partly registered abroad, not just for tax reasons, but for other reasons too.”
The stock fell 16 percent in a day.
But worse — Yandex had become a political cudgel in the increasingly frosty relations between East and West. Russia had annexed Crimea a month earlier, and the world was tense. Yandex was now seen by the Kremlin as an example of how Americans exerted influence through Russian companies.
The restrictions piled up in the years that followed.
The Kremlin passed a new law limiting which news could be distributed by internet services. The law essentially forced Yandex’s algorithms to act as a censorship tool, hiding news that didn’t suit the regime.
Then Putin followed up on what he had warned about at the media congress.
Yandex was too important to be controlled by foreign forces, as the argument went. To ensure the company wouldn’t act in a way that would harm Russian “national interests”, a foundation was put in place with the power to dismiss management. Putin had, in practice, given himself a veto over Yandex’s future.
The settlement was a dispiriting outcome of lengthy negotiations between the company and the Russian state. Yandex’s international ambitions and foreign ownership had created a barely tenable situation.
Volozh himself, as described by the Financial Times, emailed his staff after the decision to try to explain the outcome.
“We needed to find a decision that would satisfy three parties. Keep management of the company in our hands, reassure foreign investors about Yandex’s business potential, and defend national interests.”
A difficult balancing act, to put it mildly. Especially for a company with 18,000 employees, which makes them Russia’s largest internet company.
Alongside the politics, Yandex has developed like any Western tech giant. The comparison with Google is inescapable here too, when you look at the long list of projects within the company.
They have a ride-hailing service, a food delivery business, cloud services, a smart speaker with a voice assistant, a streaming music platform, self-driving cars, a payments arm, a news aggregator, and more.
In many ways Yandex is the European tech giant no one talks about. Russia is their primary market, but they have some operations across 20 countries in total, including Norway, Finland, and France. They are not currently in Sweden.
In the US, Google dominates, and in China Baidu holds the equivalent position. In the eastern part of Europe we have Yandex. Hamstrung by circumstance, but more innovative and technically superior to most.
The outlook ahead is fairly bleak. For Volozh, for Yandex, and for Russian internet users in general.
Last summer Russia tested disconnecting itself from the internet with the help of several telecom companies. Instead they used their own Russian internet called “Runet”. In such a scenario, you need to make your sites available on Runet for Russians to be able to reach them. And to do that, you’d likely have to follow the local rules for media and internet companies. Given that Meta — the parent of Facebook and Instagram — was recently labelled an “extremist organisation”, you can assume that Western participation on such a Runet will be very limited.
There, in the middle, among the locally state-controlled tech giants VK and Odnoklassniki, we will likely find Yandex once again. A company with international ambitions, talent, and ability — but stuck in the Russian political system and forced to bend to it. And whose pragmatism may be seen by posterity as cowardice and complicity in Russia’s many transgressions. Rather than the neutral line Volozh perhaps once intended.
What other choice does Arkady Volozh have? When Wired called him up, Yandex’s market cap was $16 billion, nearly SEK 150 billion. Eighty-five percent of the stock trading was done by Americans. Today the stock is suspended and the share price is effectively dead. Yandex and Volozh have not yet been hit by sanctions in connection with the invasion of Ukraine, but it seems to be getting closer.
Yandex’s deputy CEO Tigran Khudaverdyan was forced to step down directly when he personally appeared on the EU’s sanctions list. In the UK too, as The Guardian has reported, voices are now being raised that the whole company should be included and its operations limited there. The idea that Yandex would return to normal in the coming months, perhaps years, is hard to imagine.
Tigran Khudaverdyan commented on the company’s stance on the invasion in a Facebook post on March 2nd:
“War is monstrous,” he wrote.
“Today, many demand that the company immediately climb onto the tank and loudly announce its position,” he continued, but explained that they did not intend to do so, citing employee safety and the need to keep their services running.
“What we are defending now is not a business. It is services that people living in the country need, like electricity or running water. Search has to search. Taxis have to run, goods and food have to be delivered. Infrastructure has to function. For these reasons, we cannot climb onto the tank.”
What Arkady Volozh himself thinks, Wired never got to find out. The last planned interview on March 11th was cancelled twelve minutes before it was due to start.
Volozh has personally lost billions in recent weeks. Outside of Russia he could have become another Sergey Brin. Now he is on his way to becoming one of the most successful European internet entrepreneurs we’ve ever had — but one nobody knows about.
