Russia’s new ‘anti-terrorism’ restrictions on telecoms lead to skyrocketing profits for interception-technology companies

Last year, new “anti-terrorism” regulations authored by State Duma deputy Irina Yarovaya entered force in Russia. Since July 1, 2018, communications providers have been required to store copies of the last six months of all clients’ telephone conversations, text messages, and electronic correspondence. Additionally, since October 1, Russian telecoms have had to store the past 30 days of clients’ Internet traffic history.

The new law grants intelligence agencies the right to access this logged information by court order. To facilitate the transfer of this data, the legislation designates interception technology known as “SORM” (the System for Operative Investigative Activities). All communication providers licensed by Roskomnadzor (the federal media regulator) are required to install this equipment.

Just a handful of businesses won the right to supply SORM hardware to companies complying with the “Yarovaya laws”: Norsi-Trans, Special Technologies, and firms within the Citadel group, the Communications Ministry said in an official letter to the Telephone Communications Operators Association (the news outlet RBC obtained a copy of this document). In a new report one year after the implementation of the first requirements under the new anti-terrorism laws, RBC examined the SORM providers’ financials logged in the “SPARK-Interfax” database.

Earnings for most of the SORM providers has grown — by almost 300 percent in one case

The most significant revenue growth belongs to the Citadel group, which is part of Anton Cherepennikov’s business holdings. (Cherepennikov is also partners with the billionaire Alisher Usmanov.) Citadel comprises five different companies: MFI Soft, Malvin Systems, Signatech, Basis Lab, and Techargus. At least four of these companies grew in 2018 (journalists were unable to find information about Techargus).

MFI Soft’s earnings grew 294 percent to 10.3 billion rubles ($157.2 million), with its profits rising 298 percent to 2.1 billion rubles ($32.1 million). Meanwhile, Mavin Systems earned 1.7 billion rubles ($26 million) — 107 percent more than the year before; Signatech’s revenue jumped 67 percent to 741 million rubles ($11.3 million); and Basis Lab made 997 million rubles ($15.2 million), or 24 percent more in 2018.

Norsi-Trans, another major SORM equipment provider, earned 2.7 billion rubles ($41.2 million) in revenue last year, according to CEO and shareholder Sergey Ovchinnikov, and he says the company’s profits rose similarly. The only business licensed to sell SORM equipment that didn’t grow in 2018 was Special Technologies, where revenue dropped 11 percent to 1.8 billion rubles ($27.4 million).

Only one SORM provider has explained its soaring profits

Communications providers are required to install SORM equipment at their own expense. Russia’s “Big Three” — MTS, Beeline, and Megafon — estimate that they’ll spend between 40 and 50 billion rubles (about $685.8 million) over the next five years on the purchase and activation of this hardware. Two sources told RBC that Russian communications providers to this day don’t fully comply with the “Yarovaya laws.” Anna Aibasheva, a spokeswoman for VimpelCom, says the company’s implementation of the new requirements is in the “active phase,” and other telecoms simply declined to speak to journalists about the issue.

Asked about rising profits at Norsi-Trans, Ovchinnikov told RBC that telecoms spending to abide by the Yarovaya laws aren’t the company’s only source of growth. “We’re modernizing previously installed SORM systems, and working on new technological solutions,” he explained. RBC was unable to get statements from spokespeople for the Citadel group or Strategic Technologies.

The Alisher-Usmanov-linked Citadel group controls between 60 and 80 percent of the SORM market

Sergey Ovchinnikov says there are only two major players left in Russia’s SORM supplier business: his company, Norsi-Trans, with about 40 percent of the market, and the Citadel group, which controls the remaining 60 percent. (Special Technologies, he says, is quickly losing its market share.) Meanwhile, Internet Research Institute head Karen Kazaryan estimates that Citadel’s control of the SORM-equipment business is closer to 80 percent.

“Technically speaking, this matter could be of interest to the Federal Antimonopoly Service [FAS], and the agency could launch a probe to see if the current situation violates antitrust laws, if one of the competitors or telecommunications carriers files a complaint, but I doubt very much that anyone will dare to complain to FAS,” Kazaryan says.

Between 2016 and 2018, after Vladimir Putin had already signed the anti-terrorism legislation, Citadel bought four of the five companies that now make up its assets, says RBC. The Federal Antimonopoly Service’s database of rulings, however, contains no approved requests for Citadel’s acquisition of four SORM providers.