Craig Mellow

Minyanville

Russia's burgeoning Internet sector was one of the few economic achievements the country could boast about since the 2008 financial crisis. With no mineral rights to finagle and no ex-Soviet industry to privatize, entrepreneurial companies such as Yandex and Mail.Ru thrashed global competitors Google and Facebook and grew at impressive multiples without any special interference from the Kremlin. Not anymore.

Aftershocks of the Ukrainian political earthquake have shaken both firms over the past two weeks. Mail.Ru has reaped benefits from an abrupt intrusion of politics into the 'Net space, though investors have yet to recognize it. Yandex has been battered to a point where its valuation may look tempting. For both, the age of innocence is over pending any unlikely regime change in Russia, though looking at Chinese counterparts, that may not be entirely bad for business.

Yandex, which dominates the Russian search engine space with a 62% market share according to first-quarter results, has long been a cause for optimism for its troubled homeland. The largest shareholder and CEO is still Arkady Volozh, the Kazakhstan-born genius who founded the company in 2000 with a high school friend. Yandex was nurtured early on by investment from Western-backed private equity fund Baring Vostok Capital Partners, and Silicon Valley legend Esther Dyson is a long-standing board member. Its Nasdaq-listed shares more than doubled as global tech stocks caught fire in 2012-13.

All that apparently makes Yandex suspect as Vladimir Putin steers Russia toward escalating confrontation with the West. At a late April press conference, Putin noted that the Internet was developed as a "special CIA project and remains one to some extent." Yandex, he ruminated darkly, was "pushed to have a certain number of Americans and Europeans in its management. Some of its regulation is done abroad, and not only for the purpose of taxation, but for other reasons." The president suggested that Internet utilities such as search engines may soon be subject to the same government control as traditional media.

Investors' reaction was swift and severe. Yandex shares dropped 14% in two days, though they bounced back a bit last week. They're off 44% this year.

Mail.Ru has a more complex history. Launched in the early 2000s by an entrepreneur named Yuri Milner, it's now controlled by Alisher Usmanov, the metals-to-media tycoon who backed Milner's investments in Facebook and other Western companies. Partly thanks to those big kills, Usmanov is ranked by Forbes as Russia's richest man, with a net worth of $16.9 billion. Mail.Ru operates Russia's top email service and a successful knockoff of Classmates.com called Odnoklassniki. But the crown jewel it has been trying to wrest for half a decade is VKontakte, also known as VK.com, the Russian-language version of Facebook with some 80 million users.

That's where the Ukraine crisis lent a hand. Until last December, Mail.Ru was stuck at a 40% shareholding in VK, with founder Pavel Durov, a temperamental 29-year-old visionary known as the Russian Zuckerberg, clinging to 12%. Durov also remained as CEO. At that time, Durov says, he received demands from state security services to reveal details of 18 different online groups set up by backers of the Maidan uprising in Ukraine. He refused, and to preserve the company from "pressure," sold his shareholding to Mail.Ru. That, at any rate, was Durov's account, which he posted on his own network a few weeks ago, then abruptly resigned and left the country.

Mail.Ru disputes Durov's shading of the affair, claiming that the shares were transferred in keeping with an option agreement concluded years ago. In any case, Mail.Ru is at last running the show at Russia's No. 2 Internet property, where Usmanov can be counted on to smooth over relations with the heirs of the KGB.

So far investors are reacting in a knee-jerk fashion, figuring Ukraine and Putin's musings on the Internet are as bad for business as they are for Russia's larger future. Mail.Ru's London-traded shares have slid by 36% this year. Qiwi a promising Nasdaq-listed company that's a rough analog to PayPal, is down by nearly half.

It may be time to take another look, if only on a valuation basis. After its implosion, Yandex trades at a little less than 22 times forward earnings, compared to nearly 29 for its Chinese counterpart Baidu. Even as investors were bailing out amid Putin's threats, the company posted more-than-solid Q1 earnings, with revenue up 36% and net profit 19% year-on-year. While Russia is likely to flirt with recession this year -- and worse if it continues an aggressive policy on Ukraine -- growth for the Internet companies is but loosely tethered to macroeconomic performance. Online penetration will keep growing regardless. The political uproar, as noted, has actually improved Mail.Ru's strategic outlook considerably.

In a larger sense, cynical though it may sound, a heavier Kremlin hand may be positive for Yandex and Mail.Ru, as it definitively scares off their most dangerous competitors, Google and Facebook, respectively. The last thing the original Zuckerberg wants in his life is to face Kremlin demands for private user data. Chinese 'Net companies are a case in point, flourishing in large measure because of their government's grisly stance and becoming the darlings of global investors.

It was another dark day for Russia when Putin declared the Web a tentacle of the CIA. For Yandex the company, it might not be all that bad -- not to mention that the Russian Internet will be alive and well long after Putin is gone.