News Column

Tech Firms Flee Risky Moscow

May 27, 2014

By Oren Dorell, USA TODAY

Some tech companies are leaving Russia over worries of doing business in the country.
Some tech companies are leaving Russia over worries of doing business in the country.

Yoanna Gouchtchina hoped to be part of a new modern Russia when she went home with her American education, computer skills and plans to help foreign businesses get going in Moscow.

Now the CEO of her own tech start-up, Gouchtchina is joining a wave of small and large businesses pulling out or reducing their presence in Russia. Western sanctions over Russia's annexation of Crimea and Moscow's efforts to insulate the country against economic warfare make doing business in Russia too risky for a globally oriented company such as hers, she says.

"I was prepared for it but postponed it and put it off until the Russian invasion of Crimea," says Gouchtchina, who is moving her company, ZeeRabbit, to Berlin. this summer. "Right now, it feels like just the beginning of the end of those years where we were building the Russian economy. Now everything is kind of sliding back."

Andre Eggert, a managing partner at Berlin tech law firm LACORE Rechtsanwälte, says Gouchtchina is one of 10 Russian tech entrepreneurs who have turned to the firm for moving help in the past three months. While the number is small, "the fact that there were none before -- we thought it was important," he says. "Most of them are hoping for additional finance rounds with U.S. and Western European investors, which will not be happening anymore if sanctions or tensions between Russia and the West become more severe."

And these tech companies' employees, most of them young, educated and single, Eggert says, want a freer environment to live in, like Berlin, Silicon Valley or Tel Aviv.

The move involves obtaining work visas, setting up new business entities, transferring agreements and selling assets, and doing it all in a stealth fashion to "avoid involving too many authorities" in Russia who might try to interfere, Eggert said.

The small tech companies are leaving the country together with a projected $150 billion in cash expected to flee Russia this year, while large U.S. manufacturers are cutting back or quitting the Russian market, says Russia analyst Ariel Cohen of the Heritage Foundation, a think tank.

The Russian central bank said last month that $63.7 billion left Russia in the first quarter, equal to all capital lost in 2013. The World Bank estimates this year's total could reach $150 billion. GM and Ford, which were doing well in Russia's underserved auto market, decided this year to slow down or stop some production lines "because of political risk," Cohen says. Companies leave because of corruption, but the worsening economy is another factor. "The economy is projected to slow down or go into recession. Consumer income is dropping; consumer credit is dropping. So people will be buying less, including American cars," he says.

Economist Clifford Gaddy of the Brookings Institution, a think tank, says confrontation with the West over Crimea and what the State Department says is Russian meddling in eastern Ukraine have created a sense of "the Russian nation under assault."

The U.S. and Europe implemented sanctions against about 30 Russian individuals and dozens of companies over Russia's invasion of Crimea, its support for pro-Russian insurgents who have taken over government buildings in eastern Ukraine, and a military build-up along Ukraine's eastern border. The sanctions forced Visa and MasterCard to stop doing business with four sanctioned Russian banks, and the credit giants may leave Russia altogether. That would be a major blow to Russian companies with Western customers, Gaddy says.

The Russian government has responded like a country at war, he says, "taking precautions to prevent the enemy from weakening the country through free media," launching a campaign to find local sources for once-imported goods, and announcing plans for a new Russian credit system to replace the American credit companies.

So far, "import substitution" is having the greatest effect, especially in strategic sectors such as the military, which has been ordered to stop importing equipment and components from the West and find domestic suppliers, Gaddy says. Although some Russian entrepreneurs will gain business, they "will be less connected to the global economy."

Putin also signed a recent law requiring Internet sites with more than 3,000 hits a day to register and store their data on Russian servers rather than abroad. That move caused a stir because it "cuts into freedom of speech," Gouchtchina says.

People in her industry avoided keeping their data in Russia before, but the government's new effort to exert control over e-commerce and electronic transfers "is really making people nervous and looking for places to move their teams," she says.

Gouchtchina, a graduate of the University of New Mexico, earned a graduate certificate at the Monterey Institute of International Studies in Monterey, Calif. She moved to Russia a decade ago to help modernize the Russian economy and raise money for Russian start-ups, and later worked in a small Moscow-based investment firm focused on start-ups.

For more stories covering the world of technology, please see HispanicBusiness' Tech Channel

Source: Copyright 2014 USA TODAY

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