Facebook in Russia

Facebook, the exceptionally fast growing networking site, is both symbol and tool of globalization. The Internet represents development of a global society as well as economy. This particular social arena is populated primarily by young people, entirely appropriate and not at all surprising. Generational change encourages progress, and technical innovation is often most readily embraced by the young.
Facebook has just announced a new partnership with Digital Sky Technologies (DST), a very large but also new and relatively unknown Russian firm founded in 2005. A principal is Yuri Milner, who was head of Russia’s largest Internet portal, Mail.ru. Another main player is Alisher Usmanov, a billionaire from the very traditional metals industry.
The deal makes good sense for both sides. For the Russians, there are valuable contacts through association with a particularly high visibility high flying firm. This consideration transcends DST’s relatively small stake of less than 2 percent of equity.
For Facebook, there is access not only to money but also very veteran expertise. The Russians have survived and prospered in a particularly rough and raw newly emerging capitalist environment. Always keep in mind that communist control ended there less than two decades ago.
DST reportedly has stakes in approximately thirty Internet companies in Eastern Europe as well as Russia. While arguably there are fewer strong potential competitors in these markets than in more advanced economies, there is also less risk-oriented capital available, especially in a recession.
The Russian Internet entrepreneurs in this company have been able to attract money in very challenging times in part through alliance with a very traditional commodity business. Additionally, there is considerable expertise in that part of the world concerning applied as well as basic science, a positive legacy of the intense Cold War competition in space exploration as well as arms development.
The Russian marriage also helps protect Facebook from less desirable suitors closer to home. Google has had continuing interest in establishing a strong and perhaps controlling interest in the networking company. In part to head off this unattractive possibility, a significant investment by Microsoft was worked out two years ago.
At that time, Facebook stock was considerably higher than today. The current deal with DST implies a total valuation of approximately $10 billion, about one-third lower than two years ago. Nonetheless, Facebook stock has plunged much less than that of other major Internet and computer companies.
There are much wider implications to this dramatic Russian-American business partnership, with very significant political and indeed philosophical implications. First, despite the serious global recession, considerable liquid capital is available. In this context, the central role of the U.S. dollar since World War II facilitates very active international deal making even in the midst of adversity.
Second, effective international regulation of business grows steadily more important to encourage as well as oversee commerce. Paul Volcker, who currently directs Obama administration efforts to provide emergency capital to troubled corporations, previously chaired the International Accounting Standards Board based in London. In that role, he spearheaded enormous progress in modernizing accounting standards around the globe. This dedicated public servant is remarkably well suited by temperament and experience to integrate the domestic and international dimensions of commercial regulation.
Finally, the somewhat odd couple of DST and Facebook demonstrate undeniably that the Cold War is truly over. For that, let us give thanks, and hope for a happy marriage.
Arthur I. Cyr is Clausen Distinguished Professor at Carthage College in Wisconsin and author of “After the Cold War” (NYU Press and Macmillan). He can be reached at acyr@carthage.edu