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Under the Kremlin's cloud: can Russia's internet industry sustain its growth?

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Can Russian internet companies prosper on home turf?
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It's not something completely unexpected of politicians to make a poor choice of words for their public statements. It happens time and again and, ignored or ridiculed, usually slips everybody's attention without any noticeable consequences.

What's so different about Russian President Vladimir V. Putin labelling the internet as a CIA project during his speech on a media forum organized by pro-Kremlin movement People's Front for Russia in late May?

Two things: inherent political tradition encouraging Russian officials to act on the slightest whims of their leadership and current "cooling off" period in relationship with the western world. The first one puts Russian internet industry in harm's way for legislative regulations: marked as a CIA project, it makes a perfect target for hardliners to convert patriotic fervor into firm political points.

The second one is about Russia inevitably becoming a less attractive destination for foreign investments, as is already the case thanks to various economic sanctions imposed on the country. Will Russian internet endure against these odds?

Strangulation by regulation

Before leaving for summer vacation Russian lawmakers gave themselves a couple of sweaty days going through the wringer in attempt to outshine their Soviet predecessors in sheer number of restrictive legislations adopted within the shortest time span possible. Five of those legislative acts pertain directly or indirectly to internet-dependent businesses.

Since May 15 the federal law tightening control over online money transactions came into force making it impossible for individuals to transfer or receive any funds without passing through the process of personal identification carried out by banks.

The maximum size of transactions must stay within the limit of 60,000 rubles (about $1,748, £1,021) per day or 200,000 rubles (about $5,827, £3,389) per month. Non-profit organizations are to be put under special oversight if receiving the sum of 100,000 rubles (about $2,914, £1,703) or more from abroad. Declared to enforce anti-money laundering regime, the law introduces new obstacles for online trading since buying from foreign internet outlets now entails additional headache for Russian costumers.

Another legislative knife was jammed into internet trading on June 5 with implementation of the law which empowers federal government with unfettered freedom to change the limit for duty-free import. Currently duties are levied only when imported package's weight exceeds 30 kilograms or it costs more than €1,000.

This threshold can be brought down anytime the government feels like doing so, in response for the US or the EU sanctions, for instance. And it won't be the first time for lawmaking bodies to be called to arms in retaliation against the acts of economic hostility.

By refusing several Russian banks some of their services earlier in March, Visa and MasterCard inadvertently spurred the development of a new law on national Russian card payment system which came to execution on July 1.

The worst thing about the law for major payment systems like aforementioned Visa and MasterCard is not even the fact that eventually they are going to face a new competitor revelling in unprecedented support from local government. The most horror-inducing legal provision the law has to offer obliges every foreign payment system to provide interim quarterly contributions of 25% of average daily turnover to the Central Bank of Russia.

Visa and MasterCard voiced reasonable concerns over the ludicrous amount of contributions threatening to render their business in Russia unprofitable. Surprisingly so, the Russian Central Bank and Ministry of Finance took cooperative stance on the issue (nobody wants to deal with indignant cardholders' riot).

Hopefully, both companies will be able to attain a privileged status of nationally significant payment operators through inclusion in the national card payment system project. It can reduce the value of contributions by ten times. Before the law was signed by the President, Russian Minister of Finance Igor I Shuvalov promised that the document would be followed up by a number of relieving amendments. Thus the matter was left to hang until the upcoming autumn.