June 17, 2021

What is Russia’s Data Residency Enforcement Actually About?

What is Russia’s Data Residency Enforcement Actually About?

Russia, the world’s ninth most populous country and its eleventh largest economy, is a potential goldmine for investors and multinational companies. Since the fall of the Soviet Union in 1991, multinational corporations have slowly but steadily entered the Russian market, many to remarkable levels of success. 

The History

In 31 years, McDonald’s has gone from a foreign novelty across the street from the Kremlin to over 800 locations around Russia, with such a positive outlook for further Russian expansion that stock prices soared when the company announced the opening of its 800th store last autumn. Car and tech manufacturers have similarly cleaned up, with Toyota, Volkswagen, Mercedes-Benz, Kia, and Apple all bringing in over $2 billion in the market since expanding into Russia. 

Not everything has been such a smashing success, as numerous giants such as Google and Paypal, among others, have struggled to gain a foothold in Russia. Likewise, retailers like Nike and Adidas do reasonably well there, but own just 1.9% and 3.1%, respectively, of the Russian shoe market.

All told, the allure of the Russian market–in addition to further CIS markets it heavily influences–is inescapable, the potential oozing for any international company ready to jump in for the long-run. However, is the elephant in the room, the Russian political sphere, enough of a dilemma to scare investors away? 

The Present

Over the past 12 months, largely in response to the COVID-19 pandemic and the economic trouble it created, the Russian government has gone to great lengths to reestablish its agenda. The last time the Russian government acted with such fervor, when it annexed the Crimean peninsula and publicly supported separatist forces in eastern Ukraine in 2014, international business in Russia plummeted. While some of the multinational companies hurt by the 2014 ruble collapse bounced back, notably McDonald’s and Volkswagen, others like Adidas and Carlsberg have seen a constant decline in the country since. 

Russia’s turbulent history has to be at the forefront of investors’ minds as Russia has taken an increasingly aggressive stance toward social media companies over the past few months. If the Russian government cannot divorce politics from business, neither can companies. 

In contrast to its previous overt methodology, the Kremlin is taking a shrewder approach to its current move to try and force international companies to comply with Russia’s will. Moscow is using the new language of data residency and data sovereignty laws to try and keep social media and tech companies in line. 

With the official language of data residency and sovereignty still in its infancy, most countries are maneuvering to secure regulations that would maximize data security for their citizens. Still, some are also trying to use the lack of international framework surrounding the genuine issue of data security and residency to leverage political gains. Russia’s recent regulation proposals, and more importantly, the government’s actions, indicate just how important the framework of data residency will be in the near future. 

Russia’s appeal to data sovereignty and its attempt to curb social media started back in January, when the younger Russian generation began using TikTok to raise support and awareness for protests advocating for the release of prominent Kremlin critic Alexei Navalny. Government authorities responded by urging TikTok to remove any content mentioning the protests. Russia claimed TikTok was targeting teenagers and inciting them to attend unsanctioned public gatherings, a crime in the country.  TikTok quietly removed much of the content in question.

This was not an isolated event, as the Russian state watchdog Roskomnadzor had been targeting Twitter for months over the latter’s failure to immediately remove “banned content.” Roskomnadzor notes that “banned content” includes child pornography and images of drug use, but as of a few months ago also officially includes mentions of Navalny’s political movement after the government branded it as a terrorist organization.

May was particularly eventful for the Russian government in this regard, as it both sued Google, Facebook, and Twitter for failing to delete “banned content” and introduced a new bill in the Duma which will require IT operators to establish a physical presence within Russia if the operator has a daily audience of over 500,000 Russian users. The latter, if passed, would allow the Kremlin to flex its muscles more regularly and punitively if tech companies don’t comply with an increasingly political wielding of data regulations. 

The lawsuit the government has brought against the tech giants only carries fines of about $54,000 per violation–pocket change for those companies–a further indication that this song and dance is more about the perception of compliance than actual punitive financial measures. Accordingly, Russia levied another round of fines against Facebook and Telegram last week, showing that whatever the end goal, the country is taking the issue of data compliance quite seriously. If the Russian government can coax Google, Twitter, et al. into cooperating, we’ll undoubtedly see similar strategies deployed in the future as more companies seek access to the Russian market. 

The Future

How does this apply to other multinational companies, ones that don’t have to navigate the minefield of problems that social media does? The direct political implications are unclear at the moment, but what is likely is that any company doing business in Russia will need to stay abreast of even the slightest shift in regulations, data sovereignty or otherwise. Whereas some countries are putting strict procedures in place to ensure market compliance before companies start doing business there, in Russia the goalposts are perpetually moving, a symptom of a government both powerful and frenetic. 

Perhaps this all amounts to nothing more than the type of showmanship the Kremlin has perfected over the years. Regardless, companies must keep an eye on data regulations in Russia so they can safely and confidently conduct business there and help the promising Russian market bloom–a win-win situation for everyone.