Silicon Valley's Russia troubles

Tension between Russia and the West over Ukraine has halted Russian investment in the United States’ Silicon Valley-based tech industry.

“It’s safe to say a lot of investors here are taking a step back to see how the situation will unfold,” said Alexandra Johnson, who manages a California-based, $100 million venture fund at VTB, the Bank for Foreign Trade of Russia (formerly Vneshtorgbank). The pause proves that U.S. sanctions against Russia may affect stateside economies, as well.

For decades, Russia had a distant relationship with Silicon Valley capitalists. But that relationship changed in 2010 when then-Russian President Dmitry Medvedev visited the region and met with high-tech leaders. A flurry of Russian money blew into Silicon Valley. Billionaire Yuri Milner alone poured more than $2 billion into companies like Facebook, Groupon, and Zynga, an online gaming application

The collaboration has been mutual: While American startups have enjoyed increased valuations, Russian entrepreneurs have benefited from Western expertise. Today, more than 100 Russian high-tech firms have offices in the northern California region, including Russian search engine Yandex, which employs former Yahoo and Google engineers at its Palo Alto laboratory.

Tech giants are also buying stakes in Russian startups and assuming memberships on their boards. Last year, for example, Cisco acquired a stake in Russian software developer Parallels. Google executive chairman Eric Schmidt, Cisco CEO John Chambers, and retired Intel CEO Craig Barrett joined the 17-member board of Skolkovo Innovation Center, a new technology hub planned right outside Moscow.

But with the United States’ opposition to Russian actions in Ukraine, entrepreneurs and investors are becoming hesitant, fearing negative economic fallout. It isn’t clear yet how much the withdrawal of Russian funds would affect Silicon Valley or the Bay Area economy, but experts say a pause would likely only be temporary.

Axel Tillmann, who invests Russian venture capital on behalf of government-sponsored RVC-USA, said the tensions will definitely “slow things down for a while.” But he suspects the flow of investments will resume because Russian companies thrive on Silicon Valley's entrepreneurship.

Dmitry Akhanov, president of the U.S. subsidiary of Russia’s state-owned venture fund RUSNANO, said it has taken years to shape those East-West tech sector relationships. “Political turmoil can happen, but business ties are much more sustainable because those are people-to-people, and those build trust,” he said. “The diplomats need to calm down and think about the immediate consequences of their decisions. It’s very easy to hurt an economy and much harder to rebuild.”

The Associated Press contributed to this report.