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The Internet Economy In Russia Is Slowing Down, Hampered by Crisis and Hostile Laws

The RuNet economy is being stunted by government restrictions and a poor economic climate. Images mixed by Tetyana Lokot.

The RuNet economy is being stunted by government restrictions and a poor economic climate. Images mixed by Tetyana Lokot.

Although Russia’s Internet economy may appear to be growing, a close look at recent trends suggests that it is slowing down under the weight of the country’s economic crisis and draconian web legislation. 

A study on the performance of the Russian Internet business conducted by the Russian Association of Electronic Communications (RAEC) and the Higher School of Economics found the size of the RuNet business segment (online payments, content providers and other services) had increased by 31% in 2013 in comparison to 2012. 

The current value of the web economy in Russia is around 1.1 trillion rubles (a little over $25 billion), which accounted for 1.6% of country’s GDP ($2.1 trillion in total) in 2013. The data becomes even more spectacular when the study refers to “Internet-dependent businesses,” which includes all the companies using the Internet for sales, marketing, and communications, not just dedicated online businesses. The value of this larger sector is an astonishing 10% of the GDP.

The growth trend will likely continue: Experts predict that in 2014 the RuNet economy will grow by another 30 percent. For reference, Russia’s economy itself this year is expected to be stagnant, plagued by international sanctions and other troubles. 

Though the growth prospects seem optimistic, things are actually not as great as the figures seem to indicate. The cumulative Russian Internet business value actually showed less growth in 2013 compared to 2012 (when the web economy grew by 39%). Given that the Internet economy in Russia (and the economy as a whole) is still developing, such a slow down presents a serious issue.

It's also worth noting that the RuNet economy growth in 2014 was in many respects the result of higher prices, which are rising because of the ruble’s devaluation brought on by the developing economic crisis. That is, the aggregate value of goods and services produced by Internet companies rises mainly because of the growth in price and not due to any increase in quantity. 

In January-October of this year the dollar rate exchange in Russia soared by 20%, and the Euro rose by 30%. Some experts doubt that optimistic forecasts in a market strongly dependent on imports make any sense. Herman Klimenko, head of The E-commerce Development Association says making predictions about the fate of the web business segment is difficult.

Но мы не знаем, что нас ждёт в следующем году в экономике вообще. Пока же спрос на импорт продолжает падать, то есть ожидать роста рынка в целом можно с большой долей оптимизма.

We don’t know at all what to expect from the economy next year. Meanwhile the demand on imports is falling, so we can only expect an increase in the market’s size with a great deal of optimism.

As the study's authors note, there is another issue that plagues the Russian Internet economy: copyright infringement and piracy. A year ago 40% of Internet users weren’t prepared to pay for content available online at cost (many RuNet users are used to downloading movies, music and games from torrent websites for free). Now this number is 50%. Only 22% of the RuNet users have any experience of buying content online. Experts conclude that with the failing health of the economy overall, many buyers will become ‘freeloaders’ who don’t care about the content’s legality as long as they can get it for free.

RAEC and HSE imply that copywright enforcement will benefit the Internet industry, but that is far from a proven fact. There have been reports that file-sharing culture, in fact, does not kill the entertainment industry and offers several benefits. The position of the study's authors here is clear: HSE is a university funded by the government, which vehemently fights against piracy, and RAEC is a national association of content producers and industry lobbyists, none of whom favor ‘freeloading’ users. 

An interesting point in the RAEC/HSE study is that in 2013 the RuNet economy was developing under an innovative scenario and this year it is not. By the end of 2014, experts predict that the market will slow down, while advertising revenue and consumers’ purchasing power will decrease. 

There is no clear indication in the study that experts connect the slower growth and lack of innovation to prohibitive regulations on the Internet industry, but much has been said about the harsh new Internet laws that, among other things, require keeping Russian user data on servers inside Russia and demand greater government access to metadata and communications logs stored by the Internet services. However difficult it may be to measure the direct impact of legislation on the ease of doing online business in Russia, the remark about the changing trends speaks volumes. 

Is there a light at the end of this tunnel for Russian Internet businesses? The study's authors think it best for the e-commerce companies to take the initiative if they want to revert the shrinking and slowing trend. There is hope for the Russian Internet industry as, according to the study, it starts to understand that it should move ahead on its own terms and attempt to change the Internet legislative trends in Russia from prohibitive to innovative ones. 

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