Yuri Milner: Facebook's Russian Sugar Daddy

Russian oligarchs buying up shares in Facebook, Zynga, Groupon, and Twitter: Cool or not cool? According to Russia's leading liberal bloggers, it's just fine—and there should be more of it.

Yury Milner, the 47-year-old Russian-born entrepreneur behind this week's deal to bring the Russian shareholding in Facebook to almost $500 million, certainly seems to have won accolades at home. In addition to a 500 percent profit on his 2009 investment, he's also single-handedly made Russian capital a significant player in the global Internet investment market.

But then Milner and his partner, a Kremlin-connected mining magnate named Alisher Usmanov, have deep pockets.

In November, the Russian-based investment group DST successfully floated Mail.ru, a free Russian webmail service Milner took over in 2001, for $900 million on the London Stock Exchange. DST also owns major stakes in Russia's largest jobs website, HeadHunter.ru, plus two Russian Facebook-like social-networking sites.

With fellow oligarch Alexander Mamut, Usmanov is the owner the California-based global blogging site LiveJournal, which has nearly a million users in Russia and hosts President Dmitry Medvedev's personal blog.

The Russian Internet, in other words, is already owned by oligarchs. And when Mamut acquired LiveJournal in 2007—and especially when Usmanov bought into the company the following year—many bloggers feared that the purchase was at the bequest of the Kremlin, and that a crackdown on free speech would follow.

But it hasn't happened. The surprising thing is that the Internet oligarchs seem—so far—to leave free speech alone.

"A year ago when DST first bought into Facebook, they seemed to be buying at above-market prices, and I wrote then that this is not a commercial deal—there is something else going on here," says Anton Nosik, Russia's leading blogger. "But now it seems that they were right. Facebook is now valued at $50 billion, five times its price in 2009. And it's hard to argue that this is about anything but the money."

In fact, LiveJournal has become one of the few places were the Kremlin's most outspoken critics can vent their views, organize protest marches, and share videos of police violence and illegal behavior by bureaucrats. Indeed Ru.net, as the Russian Internet is known, has become the center not only of unfocused anti-regime discontent but also of an increasingly effective protest movement.

Last November, a financial blogger on LiveJournal published details of a Russian government report suggesting that $4 billion was stolen by insiders at Russia's majority state-owned pipeline monopoly during the construction of a pipeline to the Chinese border. The company and the Russian Audit Chamber have confirmed that the activities of the company's former management are under review, but have not confirmed the sums involved.

And earlier in the year, a series of Russian police officers and investigators posted video appeals to President Medvedev complaining of corruption and miscarriages of justice; Medvedev himself, who claims to spend at least three hours every day on the Internet, may have seen them.

While it's surprising enough that Ru.net remains comparatively free in a country where the state tightly controls television, it's even odder that Russian money and brains have so far played a relatively small role in the global Internet—given that Russia has no shortage of either.

(True, a Soviet computer researcher invented Tetris back in 1986, and a 17-year-old Russian teenager gave the world Chatroulette in 2009. But apart from that, Russia's big contribution to the world's Internet culture has been on the dark side of the Force—from pirate music to allegedly developing the software behind Botnet networks such as Storm.)

Before the Milner deal, Russian cash has largely stayed away from the Internet. There have been major Russian investments outside the country aplenty. But Milner is the first major Russian player in internet stocks.

"Milner is doing it for the money—there's no political agenda," says Edward Shenderovich, managing director of Kite Ventures, a London-based Internet investment company with many Russian clients. The secret of Milner's success, according to Shenderovich, is that he lavished money on his Russian startups without demanding preferred stock or guaranteed returns—and when he turned to investments outside Russia, he didn't demand management control but instead chose companies whose management he trusted. DST has no board seat on Facebook, for instance.

Milner's move may spark a rush of Russian cash into Internet stocks. Already Gazprom, the Russian state-owned gas monopoly, has set up a $100 million fund under its Leader subsidiary to invest in Silicon Valley. Almaz Capital, with offices in Moscow and California, recently bought stakes in a gaming company.

But even though Russians are getting increasingly interested in the global internet market, their involvement remains largely financial rather than operational, says Andrew Paulson, former CEO of the SUP group which bought LiveJournal. "Milner was involved in creating a series of important Internet companies in Russia—now he's speculating in shares of full-grown foreign Internet companies," says Paulson. "Those are very different things."

President Medvedev would like to make Russia into a center of Internet Innovation, ordering a "Russian Silicon Valley" built near Moscow where start-up tech companies can hatch Russia's answer to Facebook and Twitter.

It's a nice thought—and indeed Russia still has a giant brain trust of highly skilled Internet specialists, as witnessed by the huge volume of top-level hacking, spamming, and denial-of-service attacks that originate from Russia. But for the time being, Russia's smart money fancies California to Russia as a safer and more profitable bet.

This story originally appeared in The Daily Beast.