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July 2019 in Eastern Europe: Photo app hysteria, foreign ownership restrictions, battle of Internet titans in Russia

Crunchbase and East-West Digital News are teaming up to cover key tech and venture trends from Russia and other countries of the former Soviet Union. This monthly column by EWDN chief editor Adrien Henni highlights the most notable industry facts and trends from Eastern Europe and Central Asia, as well as promising tech innovations. Below is the review for July.

From Russia with privacy controversy

Last month a Russian mobile application called ‘FaceApp’ sparked an international controversy over privacy. This AI-powered photo app, which can realistically transform a person’s face, has an aging feature that drew particular attention: it allows users to have a glimpse of how they could look like with ageing.  

Once it went viral, reaching millions of users across the world, FaceApp came under harsh attacks in international media under claims that users’ personal data could be misused. Some US politicians stepped in to point out alleged threats coming from this Russian app. 

Thus, US Senate minority leader Chuck Schumer asked the FBI and the Federal Trade Commission to conduct an investigation. The app poses “national security and privacy risks for millions of US citizens,” he alleged, since facial data “could fall into the hands of something like Russian intelligence or military.”

Rumor also had it that once a user uploads a photo to FaceApp, the application gets access to all the photographs on the user’s smartphone, without any possibility to revoke such access.

The allegations were denied by FaceApp. The two-year-old Russian company assured that only photos chosen by the users are uploaded to the cloud for photo processing, and that most uploaded photos are deleted less than 48 hours after being uploaded to the servers. The company also assured that the user data is not transferred to Russia and neither sold nor shared with any third parties.

Calling “paranoia” the controversy around FaceApp, Russian tech expert Sergey Golubitsky noted that the app gets a rather limited amount of personal data from its users compared to other photo apps. Google’s photo app, in particular, can view contacts and even edit them, receive access to user geo data, and download files without any user notification, the expert noted.

No foreign ownership in Russian Internet businesses

Meanwhile the Russian parliament was hit by another kind of business xenophobia. Introduced in the last days of July, a draft bill targets “significant [online] information resources,” aiming to limit their foreign ownership to 20%. 

Should this threshold be exceeded, the concerned companies will not be allowed to conduct advertising activities in Russia – an implicit way to deprive them from their main means of existence. 

Whether such foreign companies as Apple, Blablacar, Facebook, or Google, which generate important traffic in Russia, could be concerned by the new law if adopted is not clear. More obviously targeted are Russian companies like Yandex and Mail.ru Group, which are listed on the NASDAQ and the LSE, respectively.

A flurry of criticism came from all sides – even from the government. Konstantin Noskov, minister of communications, said this initiative could hurt Russian companies by damaging their ability to compete globally. He called to protect Yandex and Mail.ru, “our national treasure.”

This is not the first initiative from the authorities to tighten their control over the country’s Internet resources. Just three months ago, President Putin signed a law on the “sovereignty of the Russian Internet,” while the arrest of US investor Michael Calvey did nothing to make foreign tech investors feel welcome in Russia. 

Tech investment and M&As in Russia

Mail.ru Group also made the news last month with a series of investments and acquisitions:

The news about Mail.ru Group’s partnership with Sberbank fueled speculations about a possible deterioration of Sberbank’s privileged relationship with Yandex, the archrival of Mail.ru Group. Sberbank had previously joined forces with Yandex in the field of e-commerce ecosystem, investing $500 million in this JV (see EWDN’s latest Russian e-commerce report). 

The Mail.ru-Sberbank partnership will compete with another Yandex JV, Yandex.Taxi (which also involves Uber). When, in mid-July, Yandex.Taxi announced a new acquisition to maintain its leadership in the ride-hailing market, Mail.ru Group immediately claimed a veto right on the transaction, which involved a company in which it had previously invested. 

The other tech deals of last month in Russia involved smaller players:

Meanwhile, Runa Capital, an international VC firms with Russian roots – headquartered in Palo Alto, California – closed $70 million for its third fund targeting early-stage “deep tech” startups.

In neighboring countries

A few notable deals took place in Ukraine: 

Just a few months after the election of a new tech-friendly president, the Ukrainian government  launched a $15 million state fund for startups. This amount may seem modest, but it is eight times higher than what was initially announced last year.

No other significant deals were reported last month in the region, putting aside the acquisition of the Belarusian games studio Swag Masha by Mail.ru Group.

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