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Russia Puts Off Data Showdown With Technology Firms

08/31/2015 | 02:09pm US/Eastern
By Sam Schechner And Olga Razumovskaya 

Russia is postponing a showdown with a handful of U.S. tech titans, including Facebook Inc., over putting data centers on Russian soil, handing an interim victory to tech companies that have resisted the divisive new rule.

Ahead of a new law that goes into effect on Tuesday requiring companies to store and process data about Russian users within the country's borders, Russian regulators have told companies such as Facebook, Google Inc. and Twitter Inc. that they don't plan to check until at least January whether the companies are in compliance, tech executives and Russian officials said.

The three companies have so far either told officials they won't have new data centers on Russian soil in the immediate future, or haven't made clear whether they plan to comply, some of the tech executives said. But Russian officials provided a loophole when they said these companies weren't on the list of those the Russian communications regulator Roskomnadzor was planning to check before 2016.

"We understand that in transnational companies where offices are spread globally, it takes a while to make a decision," said Vadim Ampelonsky, spokesman for the regulator, adding that checking up on companies like Google would take resources the regulator doesn't have. "There's only that much we can physically do."

Russia's regulatory stance eases immediate pressure on big U.S. technology firms involved in social media and messaging to implement rules that Russia says are meant to ensure privacy for Russians, but critics say could be a back door to government surveillance.

While it is unclear whether Russian regulators will later move to enforce the new law against the U.S. firms, their initial reluctance to do so illustrates how difficult it can be for governments to exercise control over U.S. tech superpowers when it comes to the sensitive issue of where they locate their data and who has access to it.

Last year, for instance, tech companies successfully resisted an attempt in Brazil to implement such a measure, arguing it would cost them hundreds of millions of dollars to build new data centers and upset the structure of the Internet.

Facebook, Google and Twitter have at times bent to censorship requests from countries including Turkey to remain online, arguing they must respect the rule of law in countries where they operate. But the companies have been far less willing to compromise on the location of their data centers, of which they typically operate only a handful globally. They say doing so would cost hundreds of millions of dollars.

"We're not thumbing our nose at law. But saying you respect local law doesn't mean you always implement it fully if it wouldn't work with how you deliver your service," one technology executive said.

To be sure, the Russian regulator says it intends to enforce the law against small and medium-size domestic and foreign companies with offices in Russia, and reserved the right to conduct spot checks on them if necessary. Some foreign companies have said they will agree to implement the law, including Samsung Electronics Co., Uber Technologies Inc. and eBay Inc., representatives for the three companies said, potentially giving it momentum.

But the regulator says it hasn't recently been in touch with Apple Inc. about the new law. And one U.S. technology executive said the companies that had said they were complying operate in hardware-manufacturing and e-commerce sectors, which often have accounting and other data already located within countries like Russia--in contrast to firms like Facebook or Twitter.

In addition, many Russians use home-grown services like market-leading social network VKontakte, which already have servers in Russia. That gives regulators more leeway to allow foreign providers to slide, some observers say. "It would be a lousy PR hit for Russia to try to take on Facebook, especially when they already have access to the personal data of online discussions," said Ethan Zuckerman, director of the Center for Civic Media at Massachusetts Institute of Technology.

Russia is a dilemma for technology companies. With a large population but relatively low penetration of Western firms, the country represents one of Silicon Valley's biggest growth opportunities. But with a government that has passed new rules giving it the ability to crack down on online speech, Russia also highlights the compromises companies must consider in that expansion, putting principles and profits in conflict.

A law that obliged bloggers to register with the government caused consternation last year, and Facebook, Twitter and Google were briefly locked in a conflict with the government over their refusal to block pages promoting a rally for opposition figure Alexei Navalny.

Russia's push for a so-called data localization law has been among the most worrying for technology executives. The executives argue the new law, passed last year as a privacy initiative, could serve as a pretext for Russian authorities to demand deeper access to user data and could give governments more power to control how the Internet behaves in their territory.

"It's not how our network is built," the U.S. tech executive said of the Russian law. "And it would set a bad precedent."

Google has been trying to run a fine line between resisting the new rules without calling attention to itself in a way that could lead regulators to crack down, or endangering local staff, according to people familiar with the matter. While the company said last year it would shutter its engineering operation in Russia, it maintains sales and marketing staff in the country.

Russian state-controlled telecommunications company OAO Rostelecom's officials said earlier this year that Google had started to move some data into Russia in preparation for the law, but the Russian regulator's spokesman now says it isn't clear whether Google will comply with the law.

Facebook, which has no office in Russia, told Russian regulators last week that it won't be ready to comply before Sept. 1, and added that it has very few data centers and therefore wouldn't commit to putting one in Russia, according to a person knowledge with the meeting. The company told Russian officials that it would be willing to discuss its privacy practices with them to address any concerns.

As recently as July, Russia had indicated that Twitter--which has no office in Russia--likely wouldn't be subject to the law because it didn't collect enough personal data. Now the Russian regulator says the company may in fact be subject to the law but that it still doesn't plan an inspection. A person familiar with the matter said Twitter isn't currently planning to locate a data center in Russia.

Write to Sam Schechner at sam.schechner@wsj.com and Olga Razumovskaya at olga.razumovskaya@wsj.com

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