Four years ago, several Russian diplomats landed in Dubai to open the Russian Centre of Digital Innovation and ICT, a space intended to enable collaboration between the UAE and Russia. It was meant to provide Russian businesses with a landing spot to explore the Middle East and North Africa (Mena) market, while also encouraging Emirati investors to seek out investment opportunities in Russia’s tech scene.
But the pandemic appears to have shuttered the Centre (Wamda’s request for comment was declined) and the subsequent war in Ukraine shifted Russia’s interests. Ironically, the war achieved what the Centre couldn’t - bring hundreds of Russian startups to Dubai.
Over the past year, there has been an influx of Russian founders and investors to the emirate, establishing operations here, away from the uncertainty of their homeland. Unlike much of the West, the UAE has not imposed sanctions on Russia, which has resulted in stronger economic ties between the two countries and Dubai in particular, becoming a safe haven for wealthy Russians.
“Today, Dubai is one of the best places for the Russian community. There are many opportunities to do business here and Russians like this. It’s a gate to the global market,” says Egor Klopenko, founder of IT Leaders VC, who also highlights the ease of obtaining UAE residency.
More than a million Russians visited the UAE last year, up by 60 per cent when compared to 2021 and many have chosen to settle in Dubai. Russians have become the main drivers of the local real estate market, accounting for the biggest number of transactions among international buyers. Bilateral trade grew by 68 per cent last year to $9 billion, of which Russian exports made up $8.5 billion, a 71 per cent increase.
“Dubai is a great place for several reasons. There is a lot of capital here, the sovereign wealth funds, the private funds, it is a good logistical hub, people from all over the world come here, there is growth, safety and sunshine,” says Alexey Milevskiy, founding partner of investment firm Multiplier.
This pulling power has seen hundreds of Russian startups relocate their headquarters to the UAE. The full impact on the local startup ecosystem remains to be seen, so far, the two ecosystems have been running in parallel, with little overlap between the two communities. It is almost “business as usual” for most of the Russian startups, with the UAE serving as host for business continuity rather than a new market opportunity.
Beyond the homeland
But there is a growing pool of Russian founders who are casting a wider net and using the UAE as a gateway to the regional market. Many have split their businesses, maintaining a Russian entity to target their home market, while also establishing a new HQ in the UAE to target the global and regional market.
One such startup is Sellematics, a B2B SaaS platform for sellers on marketplaces. Founder Daria Tkachenko initially started the business in China, before moving back to Russia during the pandemic. Last year, she moved to the UAE, prior to the outbreak of the war to capture the growth of e-commerce in the region.
“We realised that one of the best niches for us was enterprise and emerging markets, that’s why we decided to go to Russia and the Mena region,” she says. “Mena is definitely a market that will thrive, in the current economic situation, Mena will be stable and it is still growing.”
Given the sanctions imposed on Russia by the West, and the continued depreciation of the ruble, many Russians have switched to cryptocurrencies. This has led to a boom in crypto and Web3 startups among the Russian community, many of which have relocated to Dubai, reinforcing the emirate’s status as a Web3 hub.
“Our startup combines NFTs, cryptocurrency and Web3, there is no better place for startups in the world other than Dubai. It combines innovation, the newest techniques and startups,” says Nikita Yuzik, co-founder of blockchain-based proptech, ROI Estate. “We came for investment opportunities. The Web3 sphere [in Dubai] is huge, a lot of people found a safe space in the cryptocurrency market because of the recent situation and the complexity with banks and getting money out of the country.”
Yuzik’s startup is currently based in Latvia, but his interest and visit to Dubai was fuelled by the desire to raise investment. For Russian founders, Dubai has become the main destination to raise funding, with some 350 Russian angel investors believed to have relocated here over the past year. Almost all of them invest exclusively in Russian or Russian-speaking founders and like most foreign investors, see the region as a source for LPs.
“I’m not focused on the Middle East as a market, it is still not a big market, there are not many sectors that are sizeable enough to produce unicorns focused on the global market,” says Milevskiy.
This is a common sentiment among most Russian investors based in the UAE and while some may show an interest in Mena-based startups, the region’s founders are reluctant to accept investment from Russian investors according to a small pool of entrepreneurs surveyed by Wamda. Fears over lack of transparency and visibility over the source of the fund and a desire to avoid infringing on any US sanctions, particularly among those who have exposure to Western markets or investors were cited as reasons to decline Russian investment.
For now, Russian investors are comfortable with investing in Russian founders, regardless of where they are in the world. For Klopenko, who has invested in GameGreed, an Abu Dhabi-based gaming startup founded by a group of Russians, Dubai has also increased his exposure to other emerging markets that were previously not on his radar, namely India.
“The location of the UAE is great for Russian investors because they have become part of the global market,” says Klopenko. “They see startups from different countries, they can work with Asian startups. Dubai is a global hub and I can work with any country and startup from my office here.”
This global view is one shared by the startup founders themselves. Of the Russian startups that have set up their new headquarters here, it is just the founders that are based in the UAE, with their teams based in less expensive destinations.
According to Milevskiy, most of the founders who have relocated to the UAE are second time founders, those who already have an exit to their name and have the financial comfort of setting up in a city as expensive as Dubai. First time Russian founders are still drawn to Dubai, but mostly to raise investment from the Russian investors who are now here.
“Not many companies have big offices here. The cost of employees is sometimes two or three times more to get the same quality of people [who] can be based in Armenia, Kazakhstan, Georgia or Serbia, which have lower costs. Dubai is mostly for employees of mid-to-top level,” he says.
Since the outbreak of the war, more than 100,000 Russian IT specialists have left the country with most heading to Georgia, Armenia, Kazakhstan as well as Turkey and Dubai according to a report from The Moscow Times. Dubai also became the landing hub for employees of global companies based in Russia including Google, Goldman Sachs and Boston Consulting Group. While Dubai has not been the final destination for many of these employees, it has now become home for an overwhelming number of resettled Russians. This influx of talent will have a positive impact on the UAE ecosystem, argues Milevskiy.
He adds that it is only a matter of time before Russian founders pair up with local talent to co-found startups, pointing out fintech tabby’s chief operating officer Daniil Barkalov, a Russian who co-founded the buy now pay later startup with Hosam Arab in Dubai back in 2019.
“There will be more cases like tabby, we need to have a bit more time for founders to integrate and get connections with local entrepreneurs,” says Milevskiy.
When the war initially broke out, there was hesitancy to work with Russian founders, says Leo Dovbenko, co-founder and CEO of UAE-based quick commerce startup YallaHub, but this sentiment has changed.
“People were afraid to make business with Russians because you didn’t know what [would] happen because of the sanctions, now we know nothing will happen. Russian investors are investors with money, Russian entrepreneurs have money and very strong business models, but they need local partners. Such kinds of partnerships will happen, they will be beneficial,” he says, adding that the sophistication of Russian technology can help elevate the quality of tech startups in the region.
It may take a while for these sorts of relationships to develop. While the UAE has not imposed sanctions on Russia, its financial institutions, which are “closely followed by US regulations…still have to exercise caution in their dealings with Russian entities”, says Nikita Smagin, an analyst with the Russian International Affairs Council in a post for Carnegie.
“Last year, many UAE banks stopped allowing Russians to open accounts, despite the country’s drive to attract foreign investors. UAE financial institutions have more stringent requirements for Russian businesspeople than for many others, while Russians seeking to rent commercial real estate space also find themselves jumping through more hoops,” he adds.
A few of the founders interviewed by Wamda had resorted to using their different nationalities or residencies to open bank accounts and avoid the lengthier due diligence process.
There is also a difference in culture that has so far prevented greater collaboration between the two ecosystems.
“Russian-speaking or Eastern European founders are very much straight to the point, but Arabic culture is a bit different, we need to build relationships, start the discussion, continue the discussion and then ‘Inshallah’ in two years we will build something jointly. Russians in the first meeting, we either agree or don’t agree to do business,” says Milevskiy.
It may indeed take two years before the two ecosystems overlap, but for now, it seems that Russian founders and investors will continue on their own path before they recognise the opportunities in Mena. Until then, the UAE has become one of the few places in the world where US, European, Chinese and Russian technologies are readily available, all competing with one another. The implications of that, may end up having a far greater impact on the region.