Yandex Bends Over for the Kremlin

The Wall Street Journal reports:

Russia’s most prominent Web player, Yandex NV, is in discussions to give a state company veto power over changes in its ownership while ensuring independence in other areas, amid growing Kremlin calls for more control over major local Internet companies.

In recent weeks, President Dmitry Medvedev and other Russian officials have highlighted what they call the “strategic” nature of major Russian Internet companies, warning that foreign control over them could be a security concern.

But Russian laws limiting foreign investment don’t cover the sector, leaving it in a murky middle ground where rules aren’t clear and sensitive deals can be blocked on technicalities, industry officials say.

Yandex officials said they hope their approach will provide a transparent, simple mechanism for Russian authorities to exercise a veto over any significant change in Yandex’s ownership without ceding any other powers to the state.

“We understand the government has concerns,” said Yandex CEO Arkady Volozh, who is also a major shareholder of the privately held company. “Our main goal is to create a transparent scheme we can explain to shareholders.”

Yandex’s other major shareholders include management and several Western investment funds. While the authorities are concerned primarily about foreign takeover, Yandex has also expressed fears that a local buyer also could threaten the company’s success. Last year, a local tycoon with close ties to the Kremlin sought to buy a stake, but Yandex was reluctant, and the deal fell through.

Russia’s leading search engine, Yandex is well ahead of global giant Google Inc. in local market share, according to industry analysts. The proposed deal would be the first of its kind.

Despite its tight grip over national print and television media, industry officials say the Kremlin has generally remained true to its public pledges not to try to block Internet content. But officials are increasingly concerned that a major local player could wind up in the hands of foreign investors.

Foreign investment in search engines and social networks is “inevitable,” Mr. Medvedev said earlier this month. “We need to watch this, because these are questions of security,” he added.

Official interest in the Internet — which is now used by an estimated 50 million Russians — has stepped up since Mr. Medvedev became president a year ago, industry officials say.

Last fall, Russian antitrust regulators blocked Google’s purchase of an Internet-advertising company. People close to that deal said government officials privately expressed concern about selling control of a major local player to Google.

The Communications Ministry is working up security criteria to determine where foreign ownership might be restricted; a spokeswoman endorsed Yandex’s proposed approach as “one form of defense for the state.”

In Yandex’s plan, it would sell to a state company a “golden share” entitling it to block any shareholder from acquiring more than 25% of Yandex. The shareholder would have no other rights.