The Russian government is increasing pressure on global IT companies operating in its market by introducing a mandatory requirement to open branches or representative offices within the country.
Such a bill has been approved by both houses of the Russian parliament and signed by president Vladimir Putin. It was part of the instructions that Putin gave to the national government in January to introduce additional requirements for foreign IT companies operating in the Russian segment of the internet.
In their plans, the Russian authorities are following the example of Australia, which recently adopted a law obliging search engines to pay media royalties locally. Similar measures have also been applied in Turkey.
Under the Russian bill, global IT companies and internet resources with more than 500,000 daily users in Russia will have to establish branches, open representative offices or create legal entities within the territory of Russia starting from 1 January 2022.
The preliminary list of companies that will be affected by the new requirements includes: social media networks Facebook, Instagram, TikTok and Twitter; video hosting platforms YouTube and Twitch.tv; instant messengers WhatsApp, Telegram and Viber; mail service Gmail; search engines Google and Bing.com; hosting providers Amazon, Digital Ocean, Cloudflare and GoDaddy; online stores Aliexpress.com, Ikea.com and Iherb.com; and Wikipedia.org. The list can be adjusted.
The required local branches will represent the interests of their parent companies within Russia and interact with local regulators, particularly the Federal Service for Supervision of Communications, Information Technology and Mass Media (Roskomnadzor).
As well as opening representative offices, the companies will also need to register a personal account on Roskomnadzor’s website and post an electronic form for feedback from Russian citizens and organisations on their websites.
Non-compliance with the new regulations will lead to an initial warning and then a possible ban from advertising and the introduction of limits on search engines. Stricter measures could involve blocking financial transfers by the companies and slowing down or suspending their work within Russian territory.
Alexander Khinshtein, one of the co-authors of the bill and head of the government committee on information policy, information technology and communications, said companies would be offered “the most understandable and convenient conditions for doing business in Russia”
He added: “These measures are enough to establish a direct dialogue between IT companies and the Russian side – both the authorities and simply Russians. Such steps are necessary to protect the information security of Russia and have nothing to do with any censorship, or a fight against dissent.
“The law is aimed primarily at creating equal conditions for all internet resources, both of domestic and foreign origin, that operate and make profits in Russia.”
In an explanatory note, the bill’s authors wrote that currently, a number of western IT companies have no representative offices in Russia, including Facebook and Twitter, while the existing Google and Apple Rus offices are not considered to be official representatives of Google and Apple.
IT companies ‘non-transparent’
Alexander Zhuravlev, chairman of the Commission on Legal Support of the Digital Economy of the Association of Lawyers of Russia, told the Russian business paper Rossyiskay Gazeta that so far, the operations of many foreign IT companies in Russia have been non–transparent.
For example, according to Zhuravlev, Twitter has previously ignored thousands of requests from the Roskomnadzor to remove illegal content and made contact only after the regulator began to apply strict measures, such as slowing down traffic, and threatening to block the service. Representatives of Twitter refused to comment.
Most foreign IT companies that will be affected by the new law declined to comment. An official spokesman for Booking.com said: “We are still studying the potential impact of this new bill and are of course committed to complying with local regulations everywhere we operate.”
According to analysts, several foreign IT companies already have representative offices in Russia, but the same cannot be said for large media companies. Analysts also believe that amid the growing pressure from the Russian state, all the companies will consider the level of importance of the Russian market to their business, and will then make a decision about their future activities in the country.
Experts at Russia’s Vedomosti paper have calculated that opening branches or representative offices will take significant time for the companies involved because they will have to obtain additional permissions from Russian authorities, which are known for their long bureaucratic practices.
Also, as regards US companies, opening branches or representative offices in Russia may require permission from US authorities, such as the Securities and Exchange Commission, because such companies are listed on the stock exchange.
If foreign companies decide to comply with the terms of the new Russian law, their additional costs for opening an office, hiring staff, localising servers and transferring infrastructure could amount to RUB1-2.5bn ($13-32m), according to analysts’ estimates.
The ban on the cross-border transfer of personal data, which is included in the new bill, will force foreign companies to rent data storage and processing centres in Russia. As Russia is a big market for social media, large companies will have to invest in Russian infrastructure.
But there are some positives. The Russian government has not ruled out the possibility of extending the existing tax incentives for foreign IT businesses in the Russian market. That may involve tax, customs and other benefits being granted to foreign IT companies that establish joint organisations with Russian players.