What the Yandex co-founder’s travails tell us about sanctions

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This week, headlines have been dominated by the fate of Yevgeny Prigozhin — the mercenary leader who, this summer, led an uprising against Russian president Vladimir Putin before reportedly dying in a plane crash on Wednesday.

But as conspiracy theories swirl, western investors and policymakers would do well to take note of another, less publicised development — this time in connection to Yandex, the Nasdaq-listed technology group that is Russia’s equivalent of Google.

This month, Arkady Volozh, the co-founder of Yandex, who has lived in Israel since 2014, issued a formal statement condemning Putin’s war as “barbaric”. This is striking, given that virtually no other prominent Russian businessman has offered such strong public criticism to date.

Ukrainians might (understandably) dismiss this as too little, too late. After all, Volozh has stayed lamentably silent about the war until now. What is more, Yandex has not only provided a search engine that has benefited the Russian state, but its news aggregator has been “promoting state media and narratives in its search results, and de-ranking and removing content critical of the Kremlin”. After declaring this last year, the EU duly slapped sanctions on Volozh for “materially or financially” supporting the Kremlin.

But Volozh is now appealing for a reversal of the decision this September when the EU conducts its regular half-yearly review of that list. And it is worth watching how the case plays out for two reasons.

First, Yandex is one of the few big Russian companies that holds intellectual property and engineering talent that might matter to the west (never mind Putin). While it started life (like Google) as a search engine, it has recently developed skills in artificial intelligence and self-driving vehicles, mostly linked to its international division, which is headquartered in the Netherlands. That is potentially valuable in both a financial and a geopolitical sense.

Second, Volozh’s bid to remove himself from the list has thrown down a gauntlet to the west’s sanctions regime. During the past 18 months, this regime has essentially had two sides: curbs on exports, imports and financial flows linked to Russia and sanctions on Russian politicians and leaders.

However, this initial stage has not been as successful as hoped. The controls on goods and finances have proved leaky in multiple ways and the sanctions have not prompted oligarchs to break ranks with the Kremlin, with the rare recent exception of Oleg Tinkov, the maverick Russian banker.

This is partly due to fears of Putin’s revenge (illustrated by Prigozhin’s apparent fate). But another problem is the lack of any co-ordinated “off-ramp” for oligarchs who might like to negotiate a reprieve. While the UK did lift sanctions on Tinkov last month, the process is capricious.

Hence why Volozh’s case matters. The billionaire is now seeking to court western favour by arguing that he has hated the war, but kept silent to ensure the safety of his engineers who wished to leave Russia. “These people are now out, and in a position to start something new, continuing to drive technological innovation,” he said in his statement this month. Thousands of staff have now left.

This sounds laudable, but is not the whole story. Alexei Venediktov, former editor of liberal radio station Ekho Moskvy, thinks Volozh also “kept quiet because he thought his silence would save Yandex’s international projects”. Most notably, Volozh has been trying to cut a deal with Putin to spin off the international arm of the tech group, while leaving the Russian business under the control of Kremlin-friendly officials. Presumably this has now faltered.

But whatever the “truth” (always slippery in such situations), the key question now is how the EU will respond. If it keeps Volozh on the sanctions list, that will underscore the lack of a co-ordinated off-ramp for individuals, particularly since Volozh is not being sanctioned by the US or the UK.

It would also almost certainly undermine Volozh’s international ambitions. Although he resigned as chief executive after the EU decision in a bid to save the Yandex business, Volozh now wants to grow a new AI-focused venture, and cannot do this if he is locked out of western banks, due to sanctions. Rival Israeli and US groups will probably grab those emigrating engineers.

But if the EU removes sanctions from Volozh, it will signal to other oligarchs that a pathway back is possible. And, perhaps not coincidentally, I am told that Volozh would probably build his new AI-focused tech business in Europe if removed from the blacklist.

So what will Brussels do? It is currently unclear. There are no easy moral choices here. It is little wonder that the tech group’s share price currently values it at about $7bn, down from $30bn at the end of 2021. (This matters not just to Volozh, who owns an 8.5 per cent stake, but to western investment funds, such as Capital and Fidelity, which remain big investors.)

But what is crystal clear is that the west needs to develop more effective — and more effectively co-ordinated — sanctions policies. It needs to both tighten trade controls, and find ways to encourage the Russian elite to turn. The September review would be a good moment to start.

gillian.tett@ft.com