Russia

Russia’s changing relationship with data

31 March 2020 | Melanie Mingas

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In 2015, Russia introduced a data localisation law designed to protect the data held on its citizens.Specifically, the regulations were designed to ensure that any recording, systematisation, accumulation, storage, refinement and extraction of personal data of Russian citizens, was done so using only databases located in Russia.

Although enforcement was delegated to the Federal Service for Supervision of Communications, Information Technology and Mass Media (AKA Roskomnadzor), its powers only extended to administrative fines and website blocking.

It wasn’t until December of last year that effective penalties were imposed for any breach and, now there are financial repercussions in place, Russia’s data localisation law has become headline news.

According to international law firm Baker McKenzie, first violation fines now range from US$15,000 to $100,000, with repeat violators liable for $100,000 to $300,000. The law also established administrative fines for repeat violations by search engines, audiovisual services and instant messaging providers.

Crucially, both legal entities and responsible managers are liable, with the latter potentially facing fines of between $1,600 to $12,800.

The new laws apply to data controllers and processors, platforms with user-to-user communication functionality, instant messaging services, search engines and audiovisual services.

According to analysis by the World Bank, the law is intended to allow “a degree of control over transnational companies operating in Russia and helps support the development of national players”.

Supporting domestic players

Russia’s localisation law isn’t too dissimilar from similar legislation in the US, UK and Europe. But, given the open intention to create a favourable operating environment for domestic players in the emerging digital economy, its impact on market dynamics could be very different from that in other territories.

Revenue generated by digital platforms in Russia equates to around 1% of GDP, with a dollar value of $17 billion. This covers everything from social networking to employment, tourism, construction, health, e-commerce, and other areas, and there are major local players that already dominate their respective market segments.

For example, Yandex, the largest Russian web search engine, enjoys a user share of 46% and triple the revenue of Google in Russia. On social media, Russia’s Vkontakte outranks Instagram, Facebook, and Twitter in terms of messages sent per month as well as the number of authors per month: almost 60% of all publicly posted messages were on Vkontakte.

The World Bank calculates that these local services outperform the foreign platforms significantly with the latter representing a mere 30% of the market, equivalent to $8 billion.  

The advantages enjoyed by domestic players are likely to increase as the government moves to further assert its authority. However, in political terms, the internet Russia creates could look more the Chinese model than the European: a largely insular online ecosystem, fully divested from the influence of foreign-owned tech giants and dominated by domestic social networks, content platforms and search engines.

Striking a balance

The localisation laws lay the foundations for Russia’s wider digital ambitions.

In a country with such a unique demographic, geographic and industrial profile, digitisation as a driver of the wider economy can bring many benefits, whether it’s to agriculture, health or national innovation, and the digital economy will play a major role in all these areas in the coming years.

Supporting this, Russia has set out a raft of national development goals, all with a 2024 deadline. The Digital Economy of the Russian Federation programme was approved in 2017 and lists its focus areas as: normative regulation, education, personnel, cybersecurity, formation of research competencies and IT infrastructure.

There are two major takeaways: that the government “should ensure growth of at least three-fold” in the digital economy by 2024 compared to 2017, and that domestic players, once again, will enjoy an advantage over their international counterparts.

Supporting the goals government investment is expected to reach $26 billion. Further, as Data Economy reported back in December, iKS-Consulting estimates Russia will allocate at least $300m annually for the implementation of various digital economy projects in the public sector alone over the next five years.

Already the data centre market has witnessed year on year growth of 27%, and was on track to reach values of $561 million by the end of 2019.

In making its investments work, Russia will have to navigate some major issues, not least how it will interact with foreign and international tech companies while protecting the digital rights of its citizens and its own, digitally fuelled economic growth.

When it comes to competition and the ability to do business, domestic players have been handed an opportunity to compete with the global incumbents, but the country’s digital sector as a whole still has room for growth given the large youth population and appetite for connectivity and services that exists.

As the World Bank states: “As with most emerging technology regulation issues, a balance should be found between protecting the interests of national security, on the one hand, and encouraging economic growth through digital adoption, on the other.”