Russia’s technology sector is falling behind the rest of the world since being cut off by sanctions, but the leading companies have seen profits rise after their market share grew once all their international competition left the Russian market, The Bell reported on February 24.

While the war in Ukraine has cut off access to Western software, hardware and talent, it has simultaneously driven domestic market consolidation and boosted government-backed firms through state contracts and import substitution policies.

Following a sharp contraction in 2022, when the domestic IT market shrank by 10% from its RUB3 trillion peak in 2021, the sector rebounded in 2023. According to analysts at MTS Web Services, Russian tech companies collectively generated RUB3.3 trillion in revenue last year, The Bell reports, with internet companies also recovering. Forbes estimates that the combined value of Russia’s 30 largest internet firms rose from $55bn to $59bn in 2024, a level last seen in early 2022. While Russia’s leading search engine Yandex remains below its pre-war valuation, marketplace platform Ozon has more than doubled in value.

Russia’s e-commerce market expanded by 41% in 2024 to RUB9 trillion, largely driven by online marketplaces such as Wildberries and Ozon. Analysts note that Russian consumers increasingly bypass traditional search engines in favour of direct marketplace searches, a shift accelerated by the withdrawal of major Western brands and the rise of parallel imports.

State support has also fuelled the growth of domestic software developers and IT integrators. According to CNews, the revenue of Russia’s 100 largest IT companies increased by 16% in 2023, reaching RUB2.5 trillion. Forbes further reports that major software developers saw their revenues grow by 76% in 2024. However, government spending on Russian software fell by 36% last year, totalling RUB196bn, as state firms struggled to fully transition away from Western technologies despite Kremlin mandates.

Amid this expansion, rising interest rates have put financial pressure on tech companies, especially as there has been a tsunami of M&A deals as Russia’s new economy realigns to take account of the new realities. For example, Sberbank has reduced its role in the tech sector, where it had been expanding aggressively pre-war, while Russia's answer to Facebook, VK, has grown rapidly as it attempts to become Russia’s pre-eminent online company.

That has led to heavy borrowing by many companies. Yandex’s liabilities surged from RUB485bn in 2023 to RUB805bn in 2024, while VK, which reported RUB263bn in debt, breached loan covenants but secured agreements preventing early repayment demands. This phenomena has been seen across the economy as Russian companies and entrepreneurs rush to take over or buy out stakes in departing international players in the gamut of sectors and has contributed to a surge in corporate borrowing.

Despite domestic growth, Russia’s tech sector has lost ground in key areas such as artificial intelligence and autonomous vehicles. In early 2022, Yandex was preparing to launch fully driverless taxis in Moscow, Innopolis and Sirius, and had secured a preliminary $5bn partnership deal with Hyundai. However, negotiations collapsed after the invasion of Ukraine, and foreign investment in Russian AI development has largely dried up, The Bell reports.

Russia’s AI capabilities have also declined. Before the war, Sber and Yandex were at the forefront of large language model (LLM) research, launching RuGPT and YaLM years before OpenAI’s ChatGPT. However, a lack of skilled specialists, access to high-end GPUs, and funding has left Russian models trailing behind competitors.

“There is little chance that Sber and Yandex will ever catch up with Meta,” one industry insider told The Bell.

Instead, Russian firms have begun adapting open-source models rather than developing their own. Yandex AI director Alexander Kraynov acknowledged this shift, saying: “It makes no sense to train a proprietary AI model from scratch when open models are available.”

The war and subsequent mobilisation have also triggered a significant exodus of IT professionals. Estimates suggest at least 650,000 Russians have left the country since 2022, with only 10% returning, according to a report by the Russian Presidential Academy of National Economy and Public Administration. Many of these emigrants include AI researchers and engineers.

“Several key figures from Yandex’s LLM team have joined OpenAI,” a tech industry source told The Bell. Another added: “There are virtually no specialists left in Russia who can build the computing clusters needed for AI training.”

And as persistent inflation, high corporate debt and crushing interest rates starts to eat into company profits, there has been a wave of sackings in recent months as managers attempt to reduce costs that have hit the IT departments of many of Russia’s biggest companies especially hard.

Despite a reported 740,000-person IT workforce shortage, Russian tech firms have been quietly laying off employees, with some disguising mass redundancies as “optimisation” efforts. Companies have been forced to abandon expensive, long-term projects, which will only widen the gap between the pace of international IT technology development and Russia’s. Sber has reduced its IT outsourcing contracts and e-commerce operations, VK has shuttered its smart device division, and telecoms giant MTS has laid off 80% of its Nuum team, which had aimed to rival TikTok and YouTube.

“The closures of costly, inefficient projects may not be bad for the sector,” one insider noted, “but investment in long-term R&D is becoming increasingly difficult.”

One of the most significant changes in Russia’s tech landscape has been the consolidation of ownership among Kremlin-aligned investors. Yandex, which was forced into a restructuring deal that severed ties with founder and Russian tech legend Arkady Volozh, who sold out, left Russia and founded Nebius. Yandex is now controlled by the “Consortium.First” investment fund. While the official investors remain unnamed, industry sources suggest that billionaire and Russian President Vladimir Putin’s ally Yuri Kovalchuk could control up to 40% of the company through intermediaries.

Other major firms have undergone similar transitions. Avito, Russia’s largest classified ads platform, was expected to be acquired by VK, which is also linked to Kovalchuk, but was instead bought by former telecoms company MegaFon CEO Ivan Tavrin in a deal that imposed a two-year ownership lock-up – which has now expired. Meanwhile, VK itself was acquired by Gazprombank and pension fund Sogaz, whose largest shareholder is the Kovalchuk family.

Market consolidation is ongoing. Kremlin officials have reportedly pressured formerly western-own Baring Vostok fund, that has been a major player in the tech sector, to divest its stake in Ozon to an “approved” Russian buyer, with VK emerging as the likely purchaser, sources told The Bell.

While Russia’s tech sector has benefited from import substitution and state-driven investment, its long-term prospects remain uncertain. The loss of Western partnerships, declining access to cutting-edge technology, and an ongoing talent exodus pose structural challenges that government intervention alone may not resolve.