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China's Alibaba Links Up With Russia's

By Motley Fool Staff - Sep 18, 2018 at 9:27AM

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The $2 billion deal features a new e-commerce platform and is backed by the Kremlin.

In any nation, if a company has explicit support from the government, it's a big competitive advantage, and that's even more the case in countries like China and Russia. So shareholders of Chinese internet giant Alibaba (BABA -0.13%) have extra reason to be upbeat about the news that it's paying $2 billion for a 10% stake in, one of Russia's largest tech companies, and a 48% stake in their new e-commerce joint venture, AliExpress Russia.

In this segment from MarketFoolery, host Mac Greer and analyst Aaron Bush consider what it all means for the state of e-commerce in Russia, for the businesses involved, and for their rivals.

A full transcript follows the video.

This video was recorded on Sept. 12, 2018.

Mac Greer: Let's move overseas to Russia. Chinese internet giant Alibaba is entering into a $2 billion joint venture with the Russian internet services company Mail.Ru. Aaron, what strikes me, there are a lot of interesting things going on with this deal. But this deal is backed by the Kremlin through the Russian Direct Investment Fund. How should I feel about this?

Aaron Bush: I think this deal is interesting for a couple of reasons. One is the geopolitical elements of it. This deal was actually announced when Putin and Xi Jinping were meeting in Russia. As the two countries have come closer together politically, coming closer together economically has sort of lagged. In some ways, this deal is symbolic of the current state of politics, and maybe is a hint of what else is to come in the future. That's interesting.

I do think that the business angle itself is more interesting. Alibaba is taking a 10% stake in Mail.RU. That company is one of Russia's largest tech companies. They have a really strong presence in email, you can get a hint from that from the name, but also social and other online services. Something like 90% of Russians interface with that company every month. It's very penetrated in Russia.

Alibaba is partnering with them to tackle Russia's nascent e-commerce market. On top of the 10% that they're investing in the parent company, they're also going to be taking a 48% stake and a new e-commerce joint venture with them. 52% will be owned by Mail.RU. The new venture will be called Aliexpress Russia.

I think this is interesting because they have a pretty good chance of success here. On one hand, the e-commerce penetration rate in Russia is only 3% of total sales. In reference, in China, where Alibaba is coming from, it's 15% of sales.

Greer: In the U.S., around 20%.

Bush: Yeah, it's around there. The runway just from that angle is huge. But by combining Mail.RU's 100 million or so users with Alibaba's several hundred million online merchants, I could see how that could scale pretty fast. This is a big move. But they're also not alone. I think that's interesting, too.

Greer: But when I see this phrase, that the deal is backed by the Kremlin, I mean, do you really have to have a stomach for risk and volatility? Already, we've talked about some of the risks that may be inherent in some of the Chinese stocks. There's a part of me that's not quite sure I know what I'm getting there.

Bush: I do think censorship, that type of thing, will definitely exist. But would you rather invest in a company that's backed by the country that you're operating in? Or invest in a competitor that's not backed by the country? In similar ways to how Alphabet, or Google at the time, failed to operate in China, but Baidu succeeded, that was because they were more in line with the Chinese government. I have a feeling a similar thing could happen here.

But they're not alone. Yandex, in December, also partnered with a new joint venture with Sberbank, which is the state-owned, huge Russian bank, for another massive joint venture attacking e-commerce. I think no matter how you are to approach the Russian e-commerce market, which has huge upside, the government's going to be involved in some way.

Greer: And they're betting on different horses. That's reassuring, in some sense.

Bush: Yeah, through different vehicles. It's still different people behind it, but just the fact that the backing is there, and that the scale of capital going into it is there, we'll see. We'll see a battle for Russian e-commerce dominance start to play out. It's super small right now. But if we check back in five years or so, it's going to be completely different.

Greer: I just have this vision, if you're a manager, if you're the CEO, and you have to report your quarterly numbers to Putin. Maybe you just came up a little short. And you're just sweating it. You're like, "I really don't want to give that PowerPoint."

Bush: Yeah, I don't know if he'll be checking that closely, but you never know.

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