The Russian economy has long been heavily dependent on commodity industries, such as energy and raw materials. However, there seems to be a wind of change: following the global digitisation trend, the COVID-19 pandemic has added fuel to the development of the Russian tech sector and accelerated the diversification of the country’s stock market.
The Russian IT sector does not always prompt positive associations, at least in the Western world. Russia has faced countless accusations of carrying out cybersecurity attacks and meddling in foreign elections, which has led to material consequences in the form of sanctions against (Kremlin-linked) officials and organisations, limits on purchasing sovereign debt, and diplomat deportations, to name a few. Nevertheless, there has also been a positive development among publicly listed tech companies, and this article aims to take a closer look at major trends and players in the Russian tech sector.
Russian tech giants gain international recognition
In August 2020, Yandex (YNDX), at the time a $19.95bn company and Russia’s main Internet search engine with double listings on the Moscow Stock Exchange (MOEX) and NASDAQ, was added to the MSCI Russia Index. It was the first tech company to be added to the index. The 25 companies included in the MSCI Russia Index are the largest by market capitalisation and trading volume among those listed on the MOEX and account for over 80% of the free float-adjusted market capitalisation in Russia. An inclusion to this index serves as a positive sign for institutional investors across the globe.
Mail.ru Group, which is traded under the ticker MAIL on the London Stock Exchange (LSE) and MOEX, owns popular Russian social media platforms, such as VK.com and Odnoklassniki (translated as ‘Classmates’), as well as the Mail.ru email service, among others. It was included into the MSCI Russia Index in November 2020.
In February 2021, TCS Group (LSE: TCS, MOEX: TCSG), the parent company of Russia’s Tinkoff Bank, was included into the MSCI Russia Index as well. Tinkoff bank is seen as a major disruptor of the centralised Russian banking sector, where around ¾ of the market share belongs to state-owned companies.
E-commerce giant Ozon (OZON), again listed both on MOEX and NASDAQ, was added to the MSCI Russia Index in May 2021. In November 2020, the company raised almost $1bn in its initial public offering (IPO) in the US.
As of 24 June 2021, the total weight of these four companies amounts to almost 11.5% of the MSCI Russia Index. Before August 2020, that number was zero.
A deeper dive
Yandex has a very diversified business model, similar to some other tech companies described below. It owns the most popular search engine in Russia, alongside email, weather, travel and news services, a voice assistant (Alica), and devices business (Internet of Things). In addition, it offers ride-hailing business Yandex.Taxi in Russia and 16 other countries across CIS (Commonwealth of Independent States with nine post-Soviet republics as member states) and EMEA, and Uber in Russia and CIS for both B2C and B2B – as well as car-sharing services, grocery and food delivery. Moreover, Yandex owns an e-commerce marketplace and media services, such as music and movie streaming and ticket purchasing to cinemas, theatres and concerts online. It also hosts platforms for job search, used car purchases and real estate buying and renting. Finally, Yandex has begun expanding into cloud computing and self-driving vehicles business.
Yandex’s main revenue stream comes from advertisement, driven primarily from small and medium-size enterprises, which accounted for 58% of total revenue, or RUB 126.5bn ($1.7bn, assuming $1 = RUB 72.9) in 2020. As the company is looking for ways to diversify its business, this number has dropped from 81% in 2018. The second largest revenue share comes from Taxi services (excluding sales of goods) and amounts to 26%, or RUB 57.5bn ($788m) of the total amount of RUB 218.3bn ($3bn) generated in 2020. Net income amounted to RUB 24.1bn ($330m) in 2020. Based on recent performance, Yandex predicts its total revenues to be RUB 315 – 330 billion in 2021, a 44 – 51% increase YoY.
In September 2020, Yandex announced that it had made a preliminary deal to purchase Tinkoff’s parent company TCS Group for $5.5bn. One month later, however, these negotiations fell through due to disagreements with the Bank’s owner. This initiative came after Yandex had parted ways with Sberbank, a Russian state-owned bank: previously it held a stake in Yandex.Money, an electronic payment service which is now fully owned by Sberbank, and Yandex.Market, an online marketplace that entirely belongs to Yandex today. Sberbank carries a legacy of a Soviet Union bank but has recently tried to reinvent itself as a tech company providing customers with a range of services, taxis and telemedicine, for example. Now Yandex has an ambition to create its own fintech capabilities.
Yandex shares have more than doubled to $71 since its IPO on NASDAQ in May 2011 and gained over 40% in the last 12 months.
Mail.ru has a large number of business lines as well, including, among others, major social media platforms, the most popular Russian web mail, instant messaging, a search engine, MY.GAMES gaming platform (PC, console and mobile), a location-based marketplace (Youla), online education platforms as well as digital payment solutions and financial services. The company also offers B2B services, such as software and cloud computing. Moreover, it has equally shared ownership with Sberbank in ride-hailing services and food and grocery delivery. In addition, Mail.ru has a 15% stake in AliExpress Russia.
The company’s total revenue in the past quarter grew 28% YoY to RUB 27.7bn ($380m), but Mail.ru is yet to become profitable, delivering a net loss of RUB 2.5bn ($34m). The net loss, however, decreased almost four-fold YoY. Advertising and gaming accounted for 71% of total revenue in the last quarter.
In 2020, the gaming segment accounted for 38% of the revenues, with 770mn users worldwide. A total of 75% of the gaming revenue was generated outside the Russia and CIS markets in 2020, with the US, the UK and Japan being the three largest markets. Mail.ru is also developing cloud gaming for their MY.GAMES ecosystem.
In 2021, the company is expecting 18-21% in revenue growth to RUB 127- 130bn, with an improvement in EBITDA margin YoY.
Mail.ru shares have not seen any major boost yet, as they are trading about 44% lower since its IPO on LSE in 2011 and 16% lower since the IPO on MOEX in June 2020.
Tinkoff Bank operates online only and is Russia’s third-largest bank by the number of customers, with 14.8mn customers as of 1Q21. It offers consumer finance services, such as retail loans, deposits and savings, as well as lifestyle and travel services to individuals. It also issues retail debit cards, offers insurance services to individuals, and a retail brokerage platform. In addition, Tinkoff runs SME, acquiring and payments services for merchants and businesses as well as provides full coverage across Russia and international roaming through its mobile virtual network operator (MVNO) services, offering virtual numbers, music and video streaming services.
In 2020, Tinkoff’s total revenues grew 21% to RUB 195.8bn ($2.7bn), with net profit rising 22% to RUB 44.2bn ($605mn). Tinkoff has been favoured by a rapid growth of consumer credit in Russia, with most of the revenue (63%) coming from personal finance, followed by retail debit card associated fees (11%) and insurance services (10%). For 2021, Tinkoff announced a net profit prediction of at least RUB 55 billion ($753m), meaning a more than 24% YoY growth.
As it was mentioned above, in autumn 2020, a potential $5.5bn merger between Yandex and Tinkoff’s parent company TCS Group fell through due to mutual disagreements. This could have become a significant challenge to the state-owned Sberbank.
Since its LSE IPO in April 2014, TCS Group’s shares have risen by more than 360%, growing over 330% in the past 12 months.
Ozon is one of the leading e-commerce companies in Russia, with an Amazon-like business model: it offers an online marketplace for third-party sellers, complemented by a first-party business (Direct Sales). A large variety of products can be purchased on Ozon’s marketplace, ranging from electronics, home and decor and children’s goods to fresh food and car parts. The company also utilises AI capabilities to improve consumer experience and ensure smoother business management.
In 2020, Ozon’s total revenue grew by staggering 74% to RUB 104.4bn ($1.4bn), however, it is not yet profitable as it delivered a net loss of RUB 17.3bn ($237m), a 7% improvement YoY. Ozon’s core business is its Marketplace which generated 69% of GMV incl. services (gross merchandise value; that is, the total value of orders processed through Ozon’s platform, as well as revenue from services to buyers and sellers), while Direct Sales business contributed 28%. In 2021, Ozon expects at least 90% growth in GMV incl. services.
Earlier this year, Ozon announced its plans to expand into financial services as well to catch a piece of this fast-growing market.
Ozon shares are trading 38% higher since its IPO on NASDAQ in November 2020.
More to come
The number of publicly listed tech companies in Russia is likely to rise more in the future. For instance, a leading real estate online database CIAN that directly competes with Yandex.Realty, plans a US IPO in 2022.
It is rumoured that Russian online cinema ivi, currently valued at about $1bn, is also preparing for a US IPO in 2021. ivi is another competitor of Yandex and its movie streaming services.
Another Russian success story is the privately owned e-commerce company Wildberries which sells a wide range of products, excluding food. The company controls about 13% of Russia’s e-commerce market; it is known that it sold $6b worth of merchandise in 2020, and unlike Ozon, it is profitable. Forbes recently valued the company at $14.5bn. Wildeberries operates in 14 countries, including Germany, France, Italy, Spain and the US. Founder Tatyana Bakalchuk has a 99% stake in the company and has not expressed any interest in a public listing. Nevertheless, it is undoubtedly a fierce competitor on the Russian e-commerce market.
A risky business?
It goes without saying that the geopolitical tensions between Russia and the West impose a tangible risk for Russia’s economy and investors’ sentiment towards the country’s stock market. On top of all previously imposed sanctions, the US President Joe Biden is preparing another round of sanctions for Russia, this time over the poisoning of the Russian opposition leader Alexei Navalny. Nevertheless, after the broad sanctioning measures imposed on Russia amid the annexation of Crimea in 2014, the most recent sanctions were targeted more specifically at individuals and companies that have ties with the government. In case of no further escalation of the military conflict in Ukraine, or any other severe worsening of the diplomatic relations between all parties, Russian publicly listed tech companies are likely to gain more ground in the long term.
Interventions from foreign governments are not the only risk for Russia’s Big Tech – potential regulations from its own government also carry a certain degree of risk. As an emerging economy, Russia’s legal, tax and regulatory frameworks are at a developing stage and are subject to interpretation and frequent changes. Moreover, the Russian ruble is tightly connected to oil prices and can significantly fluctuate against the US dollar.
Rising inflation is another big potential risk, making many headlines around the world over the past months. Russia, being an emerging economy, is especially susceptible to rising inflationary pressures, which also concern the aforementioned companies. Increased inflation could negatively affect revenues, profitability and companies’ margins.
Bottom line
Yandex, Mail.ru, Tinkoff and Ozon are fast-growing companies with extensively diversified business models. They face strong competition from each other, privately owned companies, smaller niche players, as well as US tech giants; and it remains to be seen who will secure dominance in each of their areas of influence. Recognising that there are certain economic, geopolitical and regulatory risks, investing into Russian tech companies can be an attractive long-term opportunity, allowing investors to catch the development of this sector in one of the major emerging economies.
Disclaimer: this article is for informational purposes only and should not be interpreted as financial advice to purchase or sell any of the aforementioned securities. The author carries no responsibility for any inaccuracy in the data.
