Mark Zuckerberg’s Kremlin “Investors”

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The “Paradise Papers” reveal that Facebook took approximately $200 million of cash investment from the Kremlin.  This huge chunk of cash came from the Kremlin’s VTD Bank was “funneled through DST Global”, an investment vehicle owned by oligarch Yuri Millner (known as “космонавт” loosely translated as “the spaceman”).   The papers also show that Gazprom (the controversial Kremin-owned energy company) heavily funded an offshore company that partnered with DST Global in a large investment in Facebook.

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A story in the Guardian from 2009 about the transactions provides insight into how the deal was structured for Facebook:

[Digital Sky Technology], run by Russian entrepreneur Yuri Milner [“the Spaceman”), has also indicated that it is willing to spend at least another $100m buying out existing Facebook shareholders as part of a plan that would allow current and former staff to sell some of their shares.

Wonder who those “current and former staff” were who got the juicy opportunity of some Gazprom funded liquidity?  We do, too.

And then there’s this:

The deal represents something of a comedown for the Harvard drop-out: when Zuckerberg raised a slightly larger amount from Microsoft in late 2007, Facebook was valued at $15bn.

So this transaction was so important that Facebook’s investors approved a down round?

Zuckerberg stressed that his company did not need DST’s cash to meet his plans of reaching a cashflow positive position sometime next year. Instead, the $200m was a “buffer” against further fluctuations in the market. The deal would also give Facebook access to DST’s experience across its five social networking sites in 13 European countries.

These sites – such as Russia’s Vkontakte.ru – make money from the traditional model of online advertising but have also experimented successfully with micro-payments, allowing users to buy and sell items with the site taking a slice of the revenue, and other subscriber payment mechanisms.

“One of the things that was most interesting to me about DST’s portfolio is they have a large number of social networks and each of them monetises in different ways and all of them effectively,” said Zuckerberg. “The bottom line is each of those (sites) is doing well with a different model.”

In the case of Vkontakte.ru, one of those business models was piracy.  As recently as December 2016, Vkontakte still on the U.S. Trade Representative’s Notorious Pirate Market List:

VK.com – Russia. VKontakte, or VK.com, is the leading social networking site in Russia and Russian speaking territories and a hotbed of illegal distribution of movie, television and music files. The site’s content is popular, searching for content and then downloading it is easy, and the site supports streaming playback through embedded video players. The site is available worldwide in multiple languages, including English, and is easily one of the most visited sites in the world, with a global Alexa ranking of 23 and a local ranking of 2 in Russia. Internet service providers (ISPs) in Italy were ordered by the court of Rome to block VK.com in November 2013. VK.com had 92,640,125 unique visitors in August 2014, which was an 8% increase compared to August 2013, according to comScore World Wide data. The site operates on corporate-owned servers in Russia.

And to this day Facebook has no music licenses.  It’s unclear at this point whether any of these transactions involved the Foreign Corrupt Practices Act.

So what was in it for the Russians?  Reports show that these transactions may all have started in 2012 when Zuckerberg visited Russia at the invitation of then Russian Prime Minister Dmitry Medvedev.

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No, Senator, no rubles for Facebook.

Russian Prime Minister Dmitry Medvedev hosted an historic meeting Monday with Facebook founder Mark Zuckerberg in an effort to entice the tech-savvy entrepreneur to invest in the country’s IT industry, and perhaps lend an endorsement that would resonate with the world community. “You probably know that here in Russia we have not only oil, gas, gold, and diamonds – there is also an IT industry,” a beaming Medvedev told Zuckerberg as photographers gathered in front of the Gorki residence outside Moscow where the meeting took place.  [aka Russian hackers]

“Unlike the United States and much of Europe, Russia takes pride in learning about our citizens to maintain order,” Medvedev noted. “And the government makes no pretense in saying we need Facebook to help us ‘improve’ our own social networks for the good of the people….But with the fall of critical communication services such as Pravda and Tass, and with the demolition of the People’s Ministry of Information, our ability to provide for our citizens has nearly been destroyed,” Medvedev lamented.

“We have no idea what they’re up to or how they might be struggling. During the Soviet period, everybody had jobs, homes and food on the tables. We were a culture of love; we were all comrades, brothers, sisters — because the People’s Government knew what all the people were doing and thinking and wanting. We could prevent social problems before they happened. Now, our tranquility has been replaced by an isolated, selfish free-for-all.”

Yep–Dmitry and his friend Vlad knew a good thing when they saw it.

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Sorry about the rubles–can you pay in dollars?

 

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