Digital Monopolies: Dividing The Big Data Pie In Russia
Companies close to the Kremlin are creating a monopoly on data in Russia. Although the data market has yet to take shape, it has already been turned into a monopoly by the president’s decisions. Competition takes a back seat to matters of national importance.
The digital economy has evolved from a trendy topic into a matter of national importance, spawning priority projects and government commissions. As such, it is to receive substantial funding: almost 1.1 percent of GDP from the federal budget alone, plus about the same from the business community. These preparations suggest that the country’s leadership doesn’t just want to create a gigantic new data market in Russia, but also to divvy it up among the narrow circle of entrepreneurs and state capitalists that are close to the Kremlin.
Back in 2016, the Russian authorities conducted a successful pilot project to electronically tag fur coats in order to track their production and import. The innovation helped to reduce the number of counterfeit products, and generated 500 million rubles in budget revenues. Medicine and tobacco products were to become the next tagged items, and there were plans to expand the program to include every product by 2024.
In the fall of 2017, Prime Minister Dmitry Medvedev announced that President Vladimir Putin had decided to award the lucrative tagging project to a single operator, circumventing any bidding process. The project was transferred from the Federal Tax Service to CRPT, which is 50 percent owned by Alisher Usmanov’s USM Holdings, while the state-owned Rostec Corporation and Alexander Galitsky of Almaz Capital Partners own 25 percent each. Sberbank also expressed interest in tagging, but was politely informed that the niche had already been taken.
The digital tagging system seeks to track a product’s entire path from producer to consumer. Usmanov, Rostec head Sergei Chemezov, and their partners are to spend over 200 billion rubles on the project. Apart from earning 50 kopecks (half a ruble) on every tagged item, the operating company will have exclusive access to information about all industry-specific markets in Russia and all merchandise flow. This creates another problem in addition to questions about the fairness of the noncompetitive selection process. Who will be the proprietor of all of this data, and how will it be used?
Another digital initiative, the Platon electronic system of collecting payments from heavy trucks, triggered mass protests by long-haul truckers. Platon’s operator, RT-Invest Transportation Systems, didn’t take part in any bidding, either. Putin simply decided that the company would be awarded the toll-collection contract. RT-Invest, which is part of Rostec, owns 50 percent of the company, while another 23.5 percent belongs to Igor Rotenberg, the son of Putin’s close friend Arkady Rotenberg.
The company’s ambitions go well beyond toll collection: it envisions the creation of an enormous digital platform that would consolidate transporters, insurers, banks, Russian Railways, and warehouse and logistics operators. Market players are expected to use the platform to agree contracts, send payments, and much more.
In other words, all the data on transport and payments is to be concentrated in the hands of business entities close to the Rotenberg family (Arkady’s brother Boris is also considered to be a close friend of the president). So far, it’s only a proposal, but it could become reality with a stroke of the president’s pen. Market players have no say in what’s about to happen and will have to cooperate as directed.
Meanwhile, Inter RAO energy holding head Boris Kovalchuk is trying to convince Putin that it will be impossible to modernize the national utility information system without the involvement of his company. The unified system contains all the available information on Russia’s housing resources, building management costs and services, utility service providers, debtors, and so on.
The president has approved this partnership, too. The details haven’t been announced yet, but they are likely to mirror the Platon scheme. Inter RAO’s digital technology subsidiary, Inter RAO EIRTs, could collect a commission on all utility payments.
These are just a few telling examples of how companies close to the president are creating monopolies on data services in Russia. Although the data market has yet to take shape, it has already been turned into a monopoly by the president’s decisions. Competition takes a back seat to matters of national importance.
The integration of digital systems into the national security sector also provides numerous opportunities. Mikhail Oseyevsky, head of state-owned Rostelecom, believes that Russia’s nearly 40,000 federal employees—or at least their management—should be required to use domestically produced smartphones running on the Sailfish operating system, which will cost the state 160 billion rubles.
In March, Rostelecom’s board of directors approved the purchase of a 75 percent stake in the Open Mobile Platform and Votron companies that develop Sailfish. So far, only one mass-produced smartphone works on Sailfish, and no apps for the operating system have yet been developed. It’s a half-baked project, and none of the responsible ministers like it. They are reluctant to discuss the proposal, and always look upward when they talk about it, essentially pointing to the place where the decision was made.
Rostelecom is also prepared to finance connecting practically every Russian school to broadband Internet in exchange for students’ educational data, while state atomic energy corporation Rosatom is entertaining the possibility of participating in medical projects in exchange for medical data. Rostec’s IT subsidiary, the National Informatization Center, is one step ahead: it has been working successfully in this field for some time.
The question of regulating access to users’ data has so far generated rather limited discussion. The Russian state apparently doesn’t mind sharing information about itself with state-connected capitalists. The project portfolio that certain companies could be pressured to finance using super-profits includes “storing government documents” at a cost of 7 billion rubles, “creating a navigational-telematic platform for big auto-data” (1.5 billion rubles), and “creating a digital platform for automobile auctions” (almost 50 billion rubles).
The government has agreed to subsidize interest charges on these projects and others like them, and promises to create the necessary regulations. In exchange for their investment in these projects, businesses will likely receive access to information, which will then be turned into cash in the new digital world.
Diversified companies like Usmanov’s Megafon and Mail.ru are lobbying for amendments to the personal information law. The proposed changes will make it easier to obtain consent for processing personal data, allowing companies to better target users’ interests. After receiving initial consent to data processing, the company will be able to freely transfer data to other companies, meaning that users might lose control of their data as a result of multiple transfers.
A data transfer market also exists in the United States, but the heads of giants like Twitter, AT&T, Alphabet, and Amazon are required to report their personal data protection measures to the Senate. In the EU, the General Data Protection Regulation (GDPR) that went into effect this May completely blocks user data transfers. In Russia, the fate of the data market hangs on companies’ appetites and government officials’ ethics. It’s hard to imagine Usmanov and Chemezov reporting to the Duma on their efforts to protect user data.
In Russia, state interests always trump everything else. The big question is whether these interests can be distinguished from those held by captains of public-private partnerships. Industries that exist only on paper or don’t yet exist at all (Russia still lacks legislation regulating big data) are given away into safe hands by individual decisions of the country’s leadership. In other words, first, companies close to the Kremlin will gain access to personal data and information about the flow of merchandise, and then they will share that data with the state.