For Russian Net firms, the long winter is over

But a special list of challenges confront the pioneering entrepreneurs and investors. While technical skills are strong in Russia, business-management expertise is sorely lacking, meaning investors will need to keep closer watch on their money that they would elesewhere. Moreover, the economy's erratic performance as it transformed into a market system will continue to concern investors.

And - as is true for entrepreneurs everywhere - staking out a claim on the Internet today doesn't guarantee that early movers will remain competitive tomorrow.

"In a real land grab, you stake a claim and the land is yours," says Victor Huaco, president of Orion Capital Advisors Ltd. here. "Staking out a place on the Internet doesn't mean you have a deed to the property."

Early Settlers

Already this year, many investors have plunked down significant cash on Russian Internet real estate. Port.ru - which owns mail.ru (www.mail.ru), the nation's most popular Russian-language e-mail site - bagged a $2.5 million (2.6 million euros) investment earlier this month.

Ru-Net Holdings, formed by private equity group Baring Vostok Capital Partners and brokerage firm United Financial Group, last month invested $3 million for a controlling stake in Ozon.ru (www.ozon.ru), a St. Petersburg book and video vendor with monthly revenue of about $70,000. The holding company also has invested in Yandex (www.yandex.ru), a sophisticated search engine and one of Russia's most frequently visited sites.

In January, a newly created Internet holding company set up by Russkiye Fondy and Orion Capital Advisors invested in Russia's most popular search engine, Rambler, and Lenta.ru (www.lenta.ru), a popular online newspaper. Added to these are a $1 million Israeli investment in a search engine called Aport and a U.S. holding company's $33 million investment in a joint project with Moscow Telecommunications Corp. to build a high-speed cable and Internet network here.

"There has been a significant amount of competition among investors," says Timur Yanbuhtin, business development director at Yandex, a Moscow-based search-engine company.

An Internet-investing conference in St. Petersburg next week has attracted more than 100 participants. Run by Internet consultant Michael Novikov, chief executive of ADMIN Ltd. in St. Petersburg, the Internet & Investments Forum will focus on such topics as how to build a successful Net business and how to evaluate an Internet company.

Boris Yeltsin's exit from the Kremlin has helped foster the investor interest in Russia's Internet sector. "With [Vladimir] Putin coming to power, a lot of people began to discount the risk usually associated with Russia," says Peter Kirkow, senior economist for ICE Securities Ltd. in London.

"He's not so much of a free radical as Yeltsin," says Charlie Ryan, president of Moscow-based United Financial Group. "The jury is still out, but he's not as scary as they make him out to be," he adds, proudly displaying Mr. Putin's business card from the early 1990s. While helping Russian companies privatize in St. Petersburg nearly 10 years ago, Mr. Ryan met frequently with today's president-elect. He takes it as a promising sign that even then, Mr. Putin had an e-mail address on his card.

Esther Dyson, chairwoman of New York's EDventure Holdings Inc. and a long-time investor in Russian businesses, suggests there may simply have been an improvement in the West's perception of the Russian corporate environment, which can be just as important as physical improvements. She calls it a " 'Pygmalion' thing - a lady is a lady because of how you treat her."

Market Attraction

If you're looking to treat Russia like a hot investment market, Ms. Dyson and other investors consider Internet start-ups to be among the most attractive options - in part because they lack bad habits from Russia's old-economy companies. "The normal risks in emerging markets can be largely discounted," says Mr. Kirkow of ICE Securities, which tracks Internet stocks in Central and Eastern Europe. "With Internet companies, you often have an openness and willingness to be transparent from the start."

"When you look into a lot of Russian companies, their raison d'кtre is to steal cash flow," says United Financial's Mr. Ryan. "Internet entrepreneurs tend to be much more open-minded and committed to their business." Russia represents a large potential market of Web-surfers and e-consumers, especially as more Russians get online. "The nice thing about Russia is it's a big, big country with everyone speaking the same language," says Bill Browder, managing director of Hermitage Capital Management here in Moscow. He estimates that about 1.6% of Russia's 146 million population use the Net today. In two years time, he expects that figure to rise to as much as 8%. Advertisers like what they see. Arcady Volozh, chief executive officer at Yandex, says the Russian Internet advertising market is doubling each month. Yandex brought in $40,000 in advertising revenue last month, for example, and had already passed that level mid-way through April. By the fall, he hopes Yandex will bring in $100,000 in ad revenue each month. ICE's Mr. Kirkow estimates Russia's online ad market will grow to $50 million by 2003, a tenfold jump from $500,000 last year.

The prospects seem even greater for Russia's business-to-business market, where the Internet could help the business market leapfrog over a bog of business inefficiency. "The 'return on investment' from doing [B-to-B] in Russia is much bigger than in a developed economy where competition has existed for a while," says Miljenko Horvat, a Yale-educated Croatian who set up set up Citicorp's commercial-bank operations in Russia in the early 1990s, and today is an investor in the Russian Net as well as CEO of New York's NewspaperDirect Inc.

"We can jump over the automation of the 1970s and 80s and go straight to software for customer-relationship management and supply-chain management, to the most efficient ways of keeping costs low," says Eugene Peskin, a vice president at Moscow's Information Business Systems.

But attention must be paid, investors warn. Partly because of the shortage of management skills, investment here requires more of a hands-on approach. "You don't just buy some shares in a Net company, give them a credit line and let them go to it," says Kyle Brandon, a partner at Orion Capital. "Russia is rich in technical talent," says EDventure's Ms. Dyson. "What we need now is project-management skills."

But optimism is high that these and other challenges will be overcome, and that investment returns will be ample in the long run. "Think back in the U.S. Internet about five years," says Hermitage Capital's Mr. Browder. "That's about where we are in Russia."