When you start an online business in North America or in Europe, you usually follow 3 steps:

1.       Build your project in your garage (or kitchen). Using your friends and family money, you implement your idea in concrete html and php.

2.       Look for investors. Once you’re ready to grow, you go looking for real money, be it in the form of subventions or VC cash.

3.       Monetize and IPO. You’ve used the angel money, you found a business model using their precious advice, and you’re profitable. All you need is to IPO on Nasdaq and you’ll be the new Sergey Brin.

Now for Russia and Ukraine:

1.       Look for an oligarch. There’s no point starting a business, especially if you’re on the news market, without support from powerful people. Before you begin real work, find some protection.

2.       Spend his money freely. Your oligarch is convinced! Now you can spend as much as you want. It’s only a fraction of the profits he makes from coal-mining or oil-digging anyway.

3.       Follow the line. Your online media business running, you have to pay your patron back. Not in cash – he has enough of that. What he’s looking for is influence. And he wants you to spread his thoughts in the public sphere.

If you try to use the American model in Russia or Ukraine, you run the risk of being crushed at any time, says Maxon Pugovsky, Business Development Director at Agora Ukraine. “In the Ukraine, any media can be squashed if it’s annoying someone powerful”, he says.

In Russia, you risk much more than losing your business, as the bullet lodged in the head of Magomed Yevloyev can testify. The owner of Ingushetya.ru, an opposition website in a province near Chechenya, was killed by the police on the order of the local tyrant as he got off his plane. Don’t look for any Kremlin involvement there. Assassinations are still common in Russia and Ukraine, as a result of local power games.

“Financial assassinations” are common as well, especially when dealing with a content website that drives its revenues from advertising. Local patrons will just forbid their clients from advertising on your site.

Even if you have a project up and running, you won’t be able to bring in investors. Maxon stressed that you need a single investor to support your project. Russian and Ukrainian laws make it very difficult to split shares. “It’s very easy to throw your partner out of business if you have the right connections with the police or the judges”, he says. Add to that “you can’t take a loan at the bank” in Russia, as Runet’s number 1 web-entrepreneur, Anton Nossik, says.

What about IPOs? The Ukrainian and Russian stock exchanges are so small and illiquid that going public is not an option for a medium-sized player. Some online ventures did look at the stock market for funds, but then IPO’d in London, as Rambler did, soon to be followed by Yandex and Mail.ru.

It’s an oligarch’s world

In such conditions, oligarchs run all of the Russian and Ukrainian online media. Some of them use their media properties as they would use a PR agency. But others try to keep them profitable and to please readers.

Kommersant and Gazeta.ru, for instance, belong to arch-oligarch Usmanov, a close friend of Putin’s, but are still among the best media outlets in the country, in terms of journalistic quality and independence.

Only enlightened millionaires can develop the Russian and Ukrainian web, says Alexei. He cites Alexander Dolgin as an oligarch who understands the web. He just launched imhonet.ru, a social recommendation engine à la last.fm.

Even Webplanet.ru, Alexei’s own project, doesn’t stand on its own 2 feet. It is supported by its host provider.

Such a system gives birth to the brainchildren of billionaires. Shiny Flash interfaces are built at great cost, but user satisfaction isn’t a priority. A bit like the Flash intros you get on small businesses websites: totally useless, user- and SEO-unfriendly, but it pleases the boss.

Alexei gave 2 other examples of oligarchs wasting money online:

• Snob.ru: A social network for millionaires. $10m spent.
• Top4Top: What was to be the new Runet portal, full with TV hosts and a Flash interface. Between $10m and $30m spent.

Innovation stifled

This oligarch-run system poses a threat to innovation. In countries under the rule of law, the web has dramatically lowered the barriers to entry for media startups. The consequence is called HuffPost, Drudge Report and a media landscape turned upside down. In Russia and Ukraine, the barriers remain. It’s not as hard to get the $1m you need for an online project as to get the $100m you need for a TV, but the hurdles you’ll face are similar in nature.

Runet brings together more than 5% of the world’s internet users (and much bigger a share of programmers). In spite of this huge market, no significant online media innovation emerged from the region.

Even Sergey Petrenko, head of Yandex.Ukraine, who kept arguing that startup financing was similar in Russia and in the US, agreed that America’s innovation was rooted in its entrepreneurs having an easy access to cash. (Though he said the issue was interest rates – they stand at 6% in Russia in real terms, again 1% in the US).

Foreigner investors welcome

Only foreign companies have the power to change the status quo. It’s much harder for the local bully to bring a multinational media conglomerate to its knees. In addition, they bring in know-how and good practices (such as taking smaller bribes) that influence the local media.

On the downside, the omnipresence of red-tape makes it hard to bring in a profit. In Ukraine (more Western than Russia in our imagination) for instance, it takes 2 months to transfer money and you need a special license to operate a website.

Maxon Pugovsky clearly said that Agora’s position in Ukraine was to use its deep pockets to get rooted in the market, so as to benefit from the opportunities that will emerge in the coming years, when the crisis recedes and the market normalizes.

As Maxon put it, “now’s a good time to buy” media properties in Ukraine. Especially as major groups are leaving. TMG, for instance, is getting out of Ukraine because they did not reach 15% profitability, thus leaving room for a newcomer.

The only problem with such a strategy, despite all the good it does to the local media, is that the Russian, Ukrainian and other former-Soviet markets may never “normalize”.