Russia’s Data Law Will Hurt Its Economy — Think Tank




The Kremlin’s increasingly tight grip on the Internet in Russia will come with a hefty price tag.

A law that goes into effect on 1 September requiring foreign Internet companies to store the personal data of their Russian users within the country’s borders will cost the country’s economy a once-off $5.7 billion, and further knock-on effects as industries which rely on global data flows suffer, a report published this week said.

The data localization law creates a challenge for U.S.-based firms that have millions of Russian users but generally store data on servers outside the country. Google has already moved some servers to Russia to comply with the new law, according to the head of Russian telecommunications watchdog. Samsung 005930.SE 0.00%  has recently begun transferring Russians’ personal data to Russia, Alexander Zharov, head of Russian telecommunications watchdog, said on the sidelines of the St. Petersburg Economic Forum on Thursday.

The “On Personal Data” law, drafted last year, will require that the collection, storage and processing of Russians’ personal data is made in Russia.

“This kind of regulation has proliferated in Russia after the Snowden scandal, but in terms of protecting personal data, it does very little,” said Hosuk Lee-Makiyama, director of the European Center for International Political Economy (ECIPE), the think tank that published the report.

Revelations in June 2013 of U.S. intelligence Internet spying activities helped fuel an already established push in Europe and elsewhere to enact data localization laws governing where business and consumer data resides. Russian authorities have presented the personal-data law as a necessary security measure to protect against foreign threats and U.S. spying. But rights advocates say the Kremlin is pursuing the measure as part of a broader drive to curtail freedom of information and intensify scrutiny of Internet activity. Russia has implemented a law requiring bloggers with more than 3,000 daily readers to register with state authorities, calling into question the feasibility of anonymous authorship. Moscow is also beefing up Russia’s “right to be forgotten,” making it significantly stricter than its European counterpart.

The existing rules over personal data in Russia already cost a 0.25% loss of GDP, the researchers found.

The report said that foreign Internet firms that handle data in Russia will have to build their own data centers in the country or work with local suppliers, who might be less efficient than foreign companies. This will result in higher costs for companies and higher prices for consumers, the report argues.

The new regulation will add pressure to the battered Russia’s economy, which is already being hit with Western sanctions for Russia’s support of rebels in eastern Ukraine, as well as falling oil prices.

Russia’s GDP is projected to fall by 3.8% this year, according to the IMF, and the data localization law will take that downturn to 4.1%, amounting to an extra loss of 286 billion rubles ($5.7 billion), ECIPE researchers found.

“Every company is concerned,” Lee-Makiyama said, adding that sectors from delivery to manufacturing would be affected because of increased costs for their suppliers.

This will translate in higher import prices for Russian companies and citizens: “the law causes more damage to Russia itself than to others,” the report said.

The goal of the rule is “most likely” to foster the creation of IT jobs in Russian companies, Lee-Makiyama added, but it represents a “barrier” for foreign companies exporting to Russia, as any data about their customers will have to be stored in the country, according to the report.

“A few IT jobs may be created, but it is unlikely that the overall losses will be compensated,” Lee-Makiyama said.




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