Alibaba Teams Up With Russian Tech Giant

The Wall Street Journal, 11.09.2018

By Anatoly Kurmanaev in Vladivostok, Russia and Stu Woo in London

Deal represents unusually high-profile strategic partnership between Chinese and Russian tech giants

Chinese e-commerce giant Alibaba Group Holding Ltd. agreed to take a 10% stake in one of Russia’s biggest tech players—part of a broader deal creating what Alibaba and its new Russian partners say will be the biggest online-shopping platform in the country.

The stake in Mail.Ru Group, one of Russia's earliest and most prominent internet firms, is worth about $484 million, based on Mail.Ru's market valuation Monday. The company's global depositary receipts, traded in London, rose more than 9% early Tuesday after the deal was disclosed.

That's a modest investment, in a relatively small market, for Alibaba. Still, it represents an unusually high-profile strategic partnership between Chinese and Russian tech giants. Both companies have been instrumental in building local alternatives to the Western internet dominated by U.S. tech titans like Facebook Inc. and Inc.

Mail.Ru started out as a simple email service but has grown to be a colossus of the Russian internet. It owns Russia's most popular social network, Vkontakte. Through Vkontakte and other social networks and platforms, Mail.Ru claims it reaches 90% of Russia's internet users at least once each month.

The deal was disclosed in Vladivostok, Russia, as Russian President Vladimir Putin met with Chinese leader Xi Jinping.

"Russo-Chinese cooperation in tech is one of the most promising avenues for bilateral relations," said Kirill Dmitriev, head of the state-owned Russian Direct Investment Fund, one of the shareholders of the new joint venture.

Apart from the geopolitical overtones, the deal represents one of the highest-profile commercial alliances between the separate internet infrastructures—the communication, social media and e-commerce platforms—that have grown up in China and Russia, largely apart from the West.

Chinese and Russian governments, as well as some local businesses, have often appeared aligned in their view of the globe-spanning internet. They have recognized it as the powerful commercial and communication tool that it is in the rest of the world. But Beijing and Moscow have also seen it as a threat to social and political stability. Governments in both countries have taken steps to rein it in—for instance, censoring content and controlling access.

That has led to a Chinese internet infrastructure largely walled off from the rest of the world, populated by giant companies like Alibaba. Russia, too, has tried, with more mixed results, to keep its homegrown social media in check.

Alibaba said Tuesday it believes its experience expanding to markets outside China could help Russian e-commerce companies, too. "Our experience in China and other markets around the world makes us uniquely qualified to help build the future infrastructure of commerce in Russia and neighboring countries," said Alibaba President Michael Evans in a statement.

Alibaba already has a e-commerce presence in Russia. On Tuesday, it agreed to take a 48% stake in a new joint venture, to be called AliExpress Russia. The rest of the new company will be held by Mail.Ru, MegaFon, Russia's second-largest telecommunications firm, and RDIF, the Russian state-own investor. Alibaba will receive MegaFon's existing 10% stake in Mail.Ru as part of the transaction.

The joint venture will provide Alibaba's 600 million online merchants with access to almost 100 million users of Mail.Ru's Vkontakte, the partners said. Shareholders said all payments would be processed in Russia, while most of the traded products are likely to be imported from China.

"This is going to create an entire new ecosystem of e-commerce, which will improve the choice and access to products for Russian consumers," said Mail.Ru's Chief Executive Boris Dobrodeev. "In Russia, there's hasn't been a big, local e-commerce player. This is going to be the one."

While the exact shape of the venture remains under discussion, AliExpress Russia shareholders said they envision a consumer-focused platform, similar to or Alphabet Inc.'s Google in the U.S.

"This is a big breakthrough for the Russian digital market," said Alibaba's Mr. Evans. He said that the deal received the blessing of the company's outgoing founder, Jack Ma. Earlier this week, Mr. Ma said he was stepping down as Alibaba's executive chairman.

E-Commerce penetration in Russia is still around 3%, compared with about 15% in China, providing ample room for growth, according to Mr. Dobrodeev. Western online shopping giants like Amazon and Walmart Inc. have limited presence in Russia, creating opportunities for a local champion, he said.

Russia has turned to Chinese money to help fill the void left by a dearth of Western investors, amid Moscow's most-serious confrontation with the U.S. and its European allies since the Cold War. The West has in recent years slapped a series of increasingly biting economic sanctions on Russian individuals and companies seen as close to Mr. Putin, including some of Russia's most high profile businesspeople and companies.

Chinese investors have been cautious, but Beijing has plowed billions of dollars into companies and projects controlled by the Kremlin or by allies of Mr. Putin. China has become a big customer for Russian hydrocarbons and weapons.