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The uneasy coexistence of Yandex and the Kremlin

Russia’s biggest tech company is almost a Silicon Valley all unto itself. But that comes at a price.
Marcin Wolski

From the end of March until mid-June, while Moscow was under coronavirus lockdown, the Russian capital emptied out—mostly. On walks to the supermarket or pharmacy I was passed by streams of cyclists in the trademark yellow uniform of Yandex’s food delivery service. On the road, the few vehicles aside from police cars or buses were the taxis—disinfected at newly opened stations—of Yandex’s ride-hailing company. 

Often referred to in the West as Russia’s Google, Yandex is really more like Google, Amazon, Uber, and maybe a few other companies combined. Russians query Alice, the company’s virtual assistant, to help them order goods online in Yandex Market. They use its email system, listen to its music player, and visit its movie-recommending website. Over coffee, they read the morning news on the Yandex News aggregator. They send each other money through Yandex Wallet. And they find their way via Yandex Navigator, a tool analogous to Google Maps. Arkady Volozh, CEO and cofounder of the Nasdaq-traded company, has described it not simply as part of Russia’s Silicon Valley, but as a Russian Silicon Valley unto itself. 

New services appear at breakneck speed. Around Moscow, Yandex is testing a fleet of over 100 driverless cars, work that even the coronavirus was unable to pause. Yandex Lavka (“Yandex Shop”), a grocery delivery app that launched in June last year, guarantees deliveries within 15 minutes, faster than anything Amazon offers. One of the brains behind the project, Ilya Krasilshchik, 33, remembers how, during Russia’s turbulent transition to a market economy in the early 1990s, his mother returned from a trip with a bucket of cocoa powder just in case the family wouldn’t be able to get it at home. Now, decades later, Muscovites have excess at their fingertips: Lavka’s most popular item in the summer of 2019 was quartered watermelon—delivered cold, of course.

Yandex’s food delivery cyclists remained ubiquitous on Moscow’s streets even during the covid-19 lockdown.

On a snowy afternoon in late February, just before the pandemic gripped Russia, I turned off of a busy Moscow street into a quiet courtyard. I was meeting Rostislav Meshchersky, the 28-year-old manager of one of Lavka’s so-called “dark stores,” the places where the products ordered online are discreetly warehoused for distribution. Meshchersky led me to an open garage door at the back of the courtyard, which led down into a basement lined with shelves filled with everything from pasta to fruit juice to toilet paper. “I joke with my friends that I know immediately where to go in Moscow in the event of the apocalypse,” he said. 

Just weeks later, it wasn’t such a joke. In April, Lavka received some 900,000 orders from Russians stuck at home under quarantine, while customers of Yandex’s overall food services—restaurant delivery included—more than doubled. Although the company took a hit in businesses like ride-sharing when its entire fleet was taken off the streets during Russia’s lockdown, the people stuck at home boosted traffic on the company’s search and streaming video platforms.

But Yandex’s success has come at a price. The Kremlin has long viewed the internet as a battlefield in its escalating tensions with the West and has become increasingly concerned that a company like Yandex, with the heaps of data it has on Russian citizens, could one day fall into foreign hands. 

This means running a tech giant in Russia is a delicate dance. On the one hand is the Kremlin; on the other is New York, with investors’ demands that the company maintain its independence. But in a pandemic-­stricken world increasingly concerned with protecting borders and regulating the tech industry, Yandex’s dilemma may not be just a Russian story.

A golden arrangement

Yandex—short for “yet another indexer”—didn’t always have its fingers in everything. After getting its start in 1997, the company for years vied for local search-engine supremacy with Rambler, another Russian company. 

In the end, Rambler became the Yahoo to Yandex’s Google. But Google itself soon entered the market, and while Yandex had an edge by rooting its search algorithm in the particulars of the Russian language, its California rival began to catch up. “About half a year before Google went public, it made an offer to buy Yandex, and I have to say that we were looking at that offer very seriously,” Leonid Boguslavsky, one of the company’s first investors, told me. 

The offer was made in 2003. But one of Yandex’s cofounders, Ilya Segalovich, said, “Let’s fight,” Boguslavsky recalled. Though Segalovich died in 2013 after a bout with stomach cancer, the fight continues to this day: while Google has periodically overtaken Yandex, the Russian firm currently has about 59% of Russian search traffic to Google’s 39%. 

The same year Segalovich died, Yandex hired Greg Abovsky, a Ukraine-born, Harvard Business School–educated hedge fund analyst who got his start with Morgan Stanley in New York. “We had a realization right around the time I got here that search is going to slow down at some point,” says Abovsky, who now serves as both CFO and COO. When he joined, advertising from search accounted for around 99% of the company’s revenue. Today it’s about 64%, and total revenue grew from $1.2 billion in 2013 to $2.8 billion in 2019.

But as Yandex developed into the dominant player in the Russian tech market, it also inevitably came under the watchful eye of the authorities. 

One of the first moments was in August 2008, when Russia fought a five-day war with neighboring Georgia. As the conflict played out, Yandex News featured Russian-language articles covering both sides of the divide. The next month, according to journalists Andrei Soldatov and Irina Borogan in their book The Red Web, two Kremlin officials visited Yandex’s headquarters. One was Vladislav Surkov, the deputy chief of Russia’s presidential administration—the man who coined the Orwellian term “sovereign democracy” to describe a Russian system of governance that brooks no foreign meddling in its affairs. 

In 2008, when Russia fought a five-day war with Georgia, Yandex News featured Russian-language articles covering both sides of the divide. The next month, two Kremlin officials visited Yandex’s headquarters.

Lev Gershenzon, the director of Yandex News at the time, was given the task of explaining to the official visitors how the service worked. According to the book, he recalled showing screenshots of articles that the aggregator’s algorithm had selected as top stories. Surkov interrupted. “This is our enemy,” he said, pointing to a liberal outlet. “That’s what we do not need!”

The company promised from then on to maintain an open line to the Kremlin, though Gershenzon said he would always reiterate that an algorithm, not a person, chose the top news. Still, he didn’t always agree with how the line of communication was maintained.

“Volozh and I went to the presidential administration building several times and I said to him, ‘Listen, you have such a powerful business—why do you go to them? If it’s really needed, let them come to you,’” Gershenzon recalled in Holy War, a documentary miniseries about the Russian-language internet. “Even a geek like me knew that if you bend over for them they’ll never let you bend back upright again.”

That same year, Yandex fought off a potential takeover by Kremlin-linked oligarch Alisher Usmanov, who lobbied for President Dmitry Medvedev’s support on national security grounds. In 2009, to satisfy government interests, Yandex handed Russia’s largest lender, the state-owned Sberbank, a so-called golden share, which allowed the bank to veto transactions involving more than a quarter of Yandex’s stock. For a decade that arrangement appeased the Russian authorities—until it no longer did.

The tightrope walk

Last May, Russia passed a law to create a so-called “sovereign internet,” a state-owned communications infrastructure that would allow the country to cut itself off from the global internet while remaining online in a bubble of Russian-owned services. The law requires internet service providers to install equipment provided by the government for counteracting broadly defined “threats” to the internet’s stability and integrity, and gives the authorities sweeping powers to take control of the network if such threats appear. Over tea at his offices one afternoon last winter, Igor Ashmanov, who was the director of Yandex’s rival Rambler for a time in the early aughts and now is a proponent of the sovereign internet on state television and in government hearings, laid out its purpose.

“Imagine you live in a small village near a city that provides your electricity, and the mayor of the city has said that you are his enemies and that if he can harm you, he will,” Ashmanov told me. “You might decide to buy a generator to make sure your electricity keeps running in case this crazy mayor turns off the switch. This is what the sovereign internet is about.”

Perhaps more important to the Kremlin, the sovereign internet would also give Russia more control over what its own citizens can see online. In 2011 the Arab Spring, buoyed by social media, swept across the Middle East. That December, after Vladimir Putin announced he would run for president once again following an interim stint as prime minister, mass protests—planned on Facebook—rocked Russia. In the wake of the demonstrations, the Kremlin began to see foreign tech companies as tools used by other governments to meddle in its affairs. Putin himself vocalized those concerns at a press conference in 2014, when he described the internet as a “CIA project” and implied that Yandex itself had been “pressured” to include foreigners in its management and was registered overseas “not only for tax purposes but for other reasons.” (The parent company is incorporated in the Netherlands, and six of the 12 current board members are non-Russians, including John Boynton, the chairman, who is based in Massachusetts.)

That fear of foreign interference has only intensified over the years. During a government hearing on national security in 2018, Ashmanov described Facebook, Instagram, and Twitter as American weapons trained against Russia. “What the Americans could do with a company like Yandex in their hands is something I don’t even want to think about,” Ashmanov told me.

As the ground shifted under its feet, Yandex struggled to keep its balance, according to Boynton, the board chairman. “We’ve done everything we can to steer clear of politics,” he said in a phone interview. And yet, he added, the company found that it was increasingly getting “dragged into areas where we don’t necessarily want to be.”

Things came to a head on a Thursday morning in October 2018, when rumors leaked that Sberbank was in talks to buy up to a 30% stake in Yandex to protect the company from “potential trouble.” When trading opened up in New York, its shares plummeted 9.4%, losing over $1 billion in market value, over fears that the state lender could take control of the company. “That was the moment when we realized that there was something bigger afoot,” Boynton recalled. 

The next day the company lost another $1 billion. At an emergency meeting that went into the early hours of Saturday, the Financial Times reported, Volozh decided not to pursue the Sberbank deal. 

Yandex began talks with Putin’s administration over a new governance structure, but the pressure on it continued to intensify. In June 2019, a little-known lawmaker, Anton Gorelkin, introduced a bill to limit foreign ownership in companies that the Russian government deemed “significant information resources.” Outside investors would be allowed to own only 20% of such companies—a severe blow to Yandex, which had 85% of its shares trading on US markets. When the Kremlin came out in support of Gorelkin’s law a few months later, fears in New York wiped another $1.5 billion off Yandex’s valuation in a single day. 

In November last year, after 13 months of grueling negotiations, Yandex announced a solution. It would hand over Sberbank’s golden share—that veto power over major transactions—to a newly formed “public interest foundation” with close government ties. The veto would also be beefed up to include deals and transactions relating to intellectual property or the transfer of Russian users’ data. Although the new foundation would have 11 seats on its board, only three would belong to Yandex; the rest would be divided up among influential business groups and state-affiliated universities. Perhaps most important from the Kremlin’s perspective, the new foundation would be able to block Yandex from entering into agreements with any foreign government.

That seemed to take the heat off. Gorelkin said he would take his law back to the drawing board. Days later, the Russian parliament passed a law requiring Russian tech to be automatically preloaded onto devices sold in Russia, a move that analysts calculated would boost Yandex’s valuation by $1.4 billion. A few weeks after that, Putin, who had criticized Yandex’s foreign ties a few years earlier, praised its projects with foreign partners and spoke positively of a closed-door meeting with its senior management. 

Yet even if the Kremlin seems to have been appeased, not everyone is. Power in Russia’s government is split between rival groups, with Putin mediating between them. For the constituency known as the siloviki—officials with ties to law enforcement—the Yandex foundation was seen as a half-victory, says Tatiana Stanovaya, the founder of a political analysis site, R.Politik. “On the one hand, they see that Yandex is indirectly beholden to the government,” she says. “On the other hand, it’s purely technical. Yandex won’t just fulfill any and all demands. And if the confrontation with the West keeps escalating, [the authorities] may rethink this arrangement.”

When I spoke with Boynton last winter after the dust had settled, he was in a buoyant mood. But he also noted that things could quickly change again. “In Russia,” he said, “nothing is guaranteed.”

A template for Big Tech?

If the siloviki see Yandex as an unreliable collaborator, liberal critics see increasing signs that it is in the pocket of the authorities. In late February, for example, a policeman accused of planting drugs on an investigative reporter said he had found the journalist’s address by asking Yandex Taxi to provide it. Yandex responded that it always yields to requests by security services to “help save lives,” though Roskomsvoboda, an anti-­censorship group, pointed out that it is not always legally required to do so. 

As the pandemic grew, questions about the company’s independence became only more pointed. In early April, news surfaced that Moscow authorities were considering surveilling foreign tourists via their cell-phone data once borders opened back up again—and that Yandex might develop the tool. The company denied the claim.

Volozh and Putin
Yandex CEO Arkady Volozh (left) with President Vladimir Putin, who was visiting Yandex’s offices in 2017 to mark its 20th anniversary.

Then, when critical comments from opposition activists began popping up next to government buildings in Yandex Navigator, as a sort of digital alternative to street protests, Yandex deleted the messages, saying they were off-topic. Finally, one evening in late April, some internet users noticed that searches on Yandex for opposition leader Alexei Navalny were returning mostly negative content. Yandex apologized, saying that it was an “experiment” shown only to a small number of users. One Russian commentator, Alexander Plushev, noted that such testing is common on all tech platforms, but he added: “Any incident with Yandex is now interpreted through the prism of its control by the authorities.”

If Yandex capitulates too much to state control, it risks losing its most prized asset: its talent. “I always say that my main competitors are [Moscow airports] Sheremetyevo and Domodedovo,” says Misha Bilenko, who heads Yandex’s Machine Intelligence and Research division.

In February, a policeman accused of planting drugs on an investigative reporter said he had found the journalist’s address by asking Yandex Taxi to provide it.

Bilenko himself spent 23 years in the United States, including a decade at Microsoft, before returning to Russia several years ago. What drew him back, he says, was the access to so many different resources within Yandex and the opportunity to help improve the lives of Russians en masse. But as one employee who asked to speak anonymously told me, Yandex would lose that type of draw and power if the government tried too hard to tame it. “We have a lot of progressive people here,” the person said. “If we don’t like what we see, we’ll leave.” 

Today Yandex, at least publicly, is claiming that all is well. Its concessions to the Kremlin could have been much bigger. They’re also ones that others may soon consider. “What Yandex has done isn’t only relevant within the context of Putin’s Russia,” Bloomberg columnist Leonid Bershidsky argued last year. “It could be seen as a template for Big Tech.” 

Like Yandex, Bershidsky continued, companies such as Google or Facebook could set up quasi-­autonomous governance structures with the right to veto certain decisions. “If such a structure can win approval even from an authoritarian regime such as the Russian one … it could probably satisfy most Big Tech critics in democracies, too,” he wrote. 

Indeed, in May of this year Facebook named the first members of  its “oversight board” as a response to anger over its opaque content moderation process. The body is stacked with legal and human rights luminaries who can review and overturn some of the platform’s decisions. Though the board has nothing like the power of Yandex’s public interest foundation, it was a big concession from a company that has always fiercely defended its control over what goes on its platform. 

With politicians on both ends of the US political spectrum calling for increasing regulation of Big Tech, such moves are likely to keep happening. The kind of flexibility Yandex has had to learn may prove essential for companies that want to not only survive but flourish.

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