Russian Money in Silicon Valley

A new trove of leaked documents, the so-called Paradise Papers, have revealed that Yuri Milner, a Russian businessman with extensive investments in Silicon Valley, used funds from two Kremlin-controlled—and now U.S.-sanctioned—banks to make large investments in Facebook and Twitter. Both stakes have been sold off, but Milner's path to Silicon Valley, where he continues be a power player and lives in a $100 million compound, was paved with the Kremlin's money and a mutually beneficial relationship.

Milner's story illuminates the very beginnings of Moscow's efforts to establish a foothold in Silicon Valley, back in the days when the American president was pushing a thaw with Russia. It was a moment that set the conditions of the current one, in which the Russians' use of social media and other digital tools to undermine America's election has driven U.S.–Russia relations to their lowest point in decades. And it's revealing of the Kremlin's evolving methods in learning to control and manipulate the internet to advance its own interests—first at home, and then abroad.

Back in 2009, when I was first reporting on Milner in Moscow, his investment fund, called Digital Sky Technologies, was buying up shares in seemingly every company in Russia's burgeoning tech sector. DST raised eyebrows at the time for several reasons. First, it had a very unusual approach: It invested in competing companies. It bought stakes in VKontakte, the Russian Facebook analog, as well as in Odnoklassniki and MoiMir, two other Russian social-networking sites. "If an industry is in the early stage with no obvious leaders, we want to sponsor all potential leaders," Grigory Finger, DST's co-founder, told me at the time. This strategy allowed DST to corner the Russian web market almost completely. By 2010, the company was publicly bragging that 70 percent of Russian page views—and 50 percent of the time spent by Russians online—originated on DST-funded properties. (Milner would not comment on the record for this story.)

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Second, DST had been founded in 2005, just three years before the 2008 world financial crisis laid waste to many Russian fortunes. Yet by 2009, Milner and Finger were going on a shopping spree that included some $500 million to buy 5 percent of Facebook as well as a chunk of the American online gaming company Zynga. Where did they get all of that money? Milner and Finger had started DST with their own funds, and the returns on their early investments, though very successful, were just a fraction of those sums, pocket change compared with the money they were throwing around by 2010. (At the time, a banker close to DST, who wished to remain anonymous because he was not authorized to speak on the record, told me that the returns on DST's other investments "haven't been sufficient to cover the Facebook and Zynga deals.")

The funds, it turned out, came largely from Alisher Usmanov, an Uzbek-born billionaire who made his fortune in the mines of Central Asia. Usmanov, who owns a stake in the English football club Arsenal, was then-president Dmitri Medvedev's patron; Usmanov had advised Medvedev when he served as head of Gazprom, and had been one of the first oligarchs to support Medvedev's succession. A recent exposé by the opposition leader, Alexey Navalny, said that Usmanov bought luxury villas for Medvedev. (Usmanov sued Navalny for defamation in a Moscow court, and won.) Usmanov also had a fearsome reputation. He was known alternatively as "the hard man of Russia" and a "devourer of websites." His biography includes a jail sentence from the 1980s for fraud and embezzlement, though a Soviet court later overturned the conviction, as well as a lawsuit in the United States, later dismissed, in which DeBeers claimed that Usmanov was part of a scheme that cheated it of $800 million in prof its.

More importantly for the Kremlin, however, Usmanov had a long track record of buying properties—including paintings, publishing houses, and gas fields—on behalf of Kremlin interests. This time, Usmanov bought a 35-percent stake in DST, and was, by all accounts, Milner's cash cow. "Usmanov's stake is completely passive," the banker told me in 2010.  "He provides all the cash."

DST made some legitimately lucrative investments for Usmanov. He reportedly made $1 billion on the $200 million he invested in Facebook. The Russian companies that DST invested his money in also did quite well, but that was only half the point. The other half was to give the Kremlin a way to control these new and very influential companies, to make sure there was a receptive person there when the Kremlin called with a demand.

"What is DST? DST is the main government internet company," said one Russian tech executive, who wished to remain anonymous for fear of government reprisals, when I put this question to him in 2010. He was not the only one. In the tech community, another Russian executive told me at the time, "Usmanov"—and, by extension, DST—"is interpreted as a person who, on the Kremlin's instructions, buys up various Russian [internet] properties." Interviews with other prominent players in the booming Russian tech sector—local executives as well as Western investors—revealed that this was the near-unanimous understanding of DST's role in the Russian tech marketplace; people's equally unanimous reluctance to go on the record showed the sincerity of their belief. According to these insiders, DST's links to the Kremlin, though close, were less than transparent. "It's just not clear who, exactly, they represent and so not everybody wants to have them as an investor, " said one American investor I interviewed in 2010.

But it wasn't that DST operated purely at the Kremlin's behest. In 2009, it was rare to find a Russian businessman who would buy an unprofitable business for the Kremlin's sake—nor would the Kremlin ask him to. (This was before the days when an oligarch would be "asked" to build an Olympic stadium at Sochi or a bridge to Crimea at a massive loss for the sake of the glory of the state.) This was the age of the Kremlin and all its attendant power structures making money wherever and however they could. The web was an objectively attractive investment. At the time, the internet audience in Russia was growing faster than anywhere in Europe, and Russians were spending more hours on social media than any other nationality. "We don't have a single unprofitable company in our portfolio," DST partner Verdi Israelian told me then. Facebook and Zynga's audiences were also growing rapidly, and investing in popular Silicon Valley companies made good business—as well as PR —sense. The Russian elite was integrating its money into Western markets and their children were settling there. Investing in popular Western companies, moreover, put distance between them and the way they earned their money in the often bloody privatization battles of the 1990s.

For its part, the Russian government was starting to recognize the strategic value of the internet and wanted to establish some measure of control over such an influential space. Until Medvedev became the titular president, Vladimir Putin was preoccupied with reestablishing Russia's stature abroad and drowning in revenues from oil and raw materials at home, and he largely ignored vibrant world of the Russian web, particularly its blog-like centerpiece, LiveJournal.

Putin didn't use a computer and thought that the information war had been won. When he first came to power, he took a clever approach to monopolizing the mass media: Instead of simply censoring the programming of a television channel, Putin just had his wealthy allies or government-connected firms like Gazprom Media buy them. Despite the outcry at home and abroad, the tactic worked. Once-independent stations were technically still free to broadcast what they liked, but they wouldn't dare, because enough calls had been made, and enough people replaced, that editorial knew where the red lines lay. Ownership, in other words, had replaced censorship. A similar pattern unfolded in print media, but the web was left largely untouched.

But by the time Medvedev took office in 2009, the picture had changed. Medvedev made a big show of being tech savvy. Under the aegis of the Obama administration-led "reset" of relations between Russia and America, the two countries touted technological exchanges. Russia, reeling from a financial crisis that hit it harder than most because of its reliance on commodities and extraction, seemed committed to diversifying and modernizing its economy, with investments in high tech and even nanotech. Heady with optimism, the Obama administration believed that helping Russia on this road and integrating it into the high-tech global economy would keep Russia from backsliding into its historical adversarial, anti-Western posture. American tech executives and venture capitalists—including Jack Dorsey, the co-founder and CEO of Twitter—traveled to Russia in 2010 to meet with Russian tech entrepreneurs and Kremlin officials. Medvedev made a famous trip to Silicon Valley, where, beaming in Twitter's headquarters, he started his own Twitter account and wrote his first (misspelled) tweet.  

It was all cheerful cooperation, but the Russians had a different agenda. Petrified by the grassroots mobilization of the Ukrainian Orange Revolution of 2004-2005, the Kremlin realized the tactical importance of the web and began to make inroads into the free spaces of the Russian internet. The loss of the information war online during the 2008 with Georgia only cemented the Kremlin's resolve to get serious about the web. Unlike the Chinese or Iranian governments, however, the Russians took more supple approach—at least initially. There were no firewalls in Russia, and it was still rare for the government to block unfriendly sites. Instead, the Kremlin has made sure that it had the option of getting a sympathetic listener on the line at any internet company if there was, say, a war or a political conflict in which its side was portrayed unflatteringly. "Here you have a more complicated situation where perhaps the government theoretically could exert power but hasn't yet,� � another Western investor active in the Russian tech industry told me in 2010.

And while the Kremlin was eager to attract Western investors, it didn't want them everywhere. In the spring after his election as president, Medvedev announced that the Kremlin would keep a close eye on foreign investment in "strategic" internet firms. "The arrival of foreign investors … is unavoidable on one hand. But at the same time—I hope this doesn't sound too conservative—this needs to be watched closely because it is a security issue," Medvedev said in April 2009. It was at that point that the Russians began honing at home the model of influence that's currently preoccupying the West.

Led by Vladislav Surkov, the savvy Kremlin strategist who was a generation younger than Putin and understood the web, the Kremlin began to recruit loose, untraceable armies of pro-government bloggers and commenters. It also cultivated ties with private new media companies in Russia that professed a more government-friendly point of view. Surkov, for instance, reportedly organized private funding for an internet publishing venture by then 28-year-old Konstantin Rykov, a fiery and openly pro-Kremlin blogger in 2007.

This was a key moment: With Surkov's guidance, the Kremlin had shifted to a very clever tactic. Instead of allowing itself to be seen as openly calling the shots—as it had been when state companies took control of the independent news media—the Kremlin hid from view almost completely. As a result, a much more wholesome picture emerged: Here was a young tech entrepreneur, a poster boy for Russia's well-deserved reputation as a scientific and technological powerhouse, attracting private investment on his own. The Kremlin's involvement was impossible to prove, but its influence was beyond a doubt.

Yuri Milner and DST, which in just a couple years had nearly consolidated the Russian web by purchasing strategic stakes in just about everything, allowed the Kremlin another way to exercise that power. It became yet another example of the symbiotic relationship business and politics in modern Russia.

Furthermore, it seems that the Usmanov-DST partnership was facilitated with the Kremlin's blessing—or orchestration. Though no government money seems to have been involved, the deal looked much like the one with Rykov. There was Alisher Usmanov, the requisite favored funder with a close relationship to Medvedev. Then there was DST, the favored private company which could be a trusted lever of control if the need arose. Milner was known to people in the Russian tech industry as a "government guy" and served on Medvedev's Commission for Modernization, where he promoted government subsidies for broadband expansion in Russia, which would provide a huge boost to DST portfolio companies. "They made Milner an offer he couldn't refuse," said an industry executive in 2010 who was also not authorized to speak to the press.

After the pro-democracy protests of 2011-2012, which had been organized mostly through social media, the Russian government ditched this softer, nebulous approach. It started blocking a growing list of sites, and passed a raft of restrictive laws regulating the internet. One would force Western media companies like Facebook, Google, and Twitter to keep their data on Russian users on servers inside and Russia, and to hand them over whenever the Russian authorities request them. So far those Western companies have hemmed and hawed, and the Russian government has dragged its feet on implementing the law.

Milner, meanwhile, has been of no help, in part because American companies don't work like Russian ones. After taking Mail.ru, one of his Russian internet companies, public in late 2010, Milner sold off the rest of his Russian assets just as Moscow was erupting in anti-Putin protests, and moved permanently to California just as the Russian parliament was passing all those draconian laws. A spokesman for Milner told me he hasn't been back in Russia since 2014, and that he has not a single Russian investment left. The Russian government had found new owners to exercise control over Russian social-media companies like Vkontakte, which it would do as the protests in Kiev started gaining steam in 2013, causing the company's young founder Pavel Durov to eventually flee Russia. According to Durov, when the Kremlin began to pressure VKontakte to delete posts about the EuroMaidan, it did so through the stakes owned by Usmanov, and later, Igor Sechin, the second-most powerful man in R ussia. By this point, though, Milner was long gone, having used the Russian government to vault himself—and his new billions—safely out of Russia and away from that very government.

Source: Russian Money in Silicon Valley