For the non-oligarchs in the audience, doing business in Russia has never been exactly easy or fair.
Case in point: The World Bank as of June 2014 ranked the Russian Federation 62nd in its ease of doing business index, behind paragons of capitalism like Greece and Tunisia. And for all its economic potential, Russia has more than frustrated its share of international corporate interests over its brief post-communist history.
The latest casualty of Russia's famously frustrating commercial climate could very well be Google (GOOG 2.36%) (GOOGL 2.39%). The search powerhouse is reported to be removing the engineering component of its Russian operations from the country, a move that could strengthen the bull thesis for homegrown Russian search company Yandex (YNDX -6.79%).
Google throwing in the towel?
As is so often the case with Russian business in general, this story is by no means clear-cut. On the surface, though, it appears Google opted to rotate its engineering teams out of Russia ahead of the implementation of a recently passed national law that will require Internet companies such as Google and Yandex to house servers containing data about their Russian users solely within Russian borders. However, other factors are likely driving this narrative as well.
Russian government Internet censorship and monitoring has been on the rise in recent years, which could also help explain Google distancing itself from the country. A law enacted earlier this year requires all bloggers with 3,000 or more daily readers to register with the government, including disclosing their home addresses and other information. In such a climate, it seems more than plausible that Google might run afoul of the Russian government should it refuse to, say, disclose user information it might deem private. It is also worth recalling that Google removed the bulk of its mainland China business operations in 2010 rather than cooperate with government censorship rules, a move that proved a boon for Chinese search powerhouse Baidu.
It's difficult to get an exact sense of Google's motives here. Is this an isolated move or the start of something bigger?
Google insists it remains committed to expanding its presence in Russia in the years ahead, and the company will keep other departments, including marketing and customer support, in the nation. According to one source, Google actually plans to increase its investments in Russia in the next two years. However, such statements, as Google moves arguably the most critical segment of its Russian workforce out of the country, don't exactly inspire confidence.
Does this make Yandex a buy?
As you might expect, the answer to this question likely hinges on whether you accept Google's maneuvering at face value. Personally, I suspect Google will avoid a complete exodus from Russia. However, that also does not invalidate the investing thesis for Yandex.
Yandex still easily controls the bulk of the Russian search market, with a 60% share as of November. Google, though, has made headway in expanding its presence in the past year: In November, the U.S. company controlled an estimated 31.7% of the Russian search market, up from 26.4% one year prior. However, even if Google continues to make moderate headway in Russia, Yandex might prove a compelling buy today for the truly long-term investor.
The macroeconomic outlook for Russia has quite publicly gone from bad to worse in the past few months. International sanctions and plummeting oil prices have wrecked the ruble and stricken the nation's economy. Unsurprisingly, this has also dragged down Russia- centric stocks, including Yandex, to rock-bottom levels. Keep in mind that Yandex, after falling an astounding 8.4% on Monday and trading down again Tuesday, trades just at 14 times its last 12 months' earnings, sports a strong balance sheet, has an impressive history of profitability and growth, and is expected to grow at an average annual rate of 14.7% over the next five years.
As a high-growth company operating in a volatile market, there's little doubt the short-term outlook for Yandex very well could involve more downside pressure on its stock price. This is not a a company for the faint of heart or those without an extremely long-term investment horizon (think +10 years). However, with a proven and high-margin business model and a strong grip on its market, Yandex is certainly worth watching as the Russia economy and stock market falter.