Source: Travel.Earth

In the eighteen months since the invasion of Ukraine began, Russia’s economy has weathered profound shocks as it evolves into something altogether different. The country’s large gaming sector has been exposed to the effects of the war in ways that are transforming one of the world’s most important games ecosystems. 

Russia is Europe’s biggest games market by population, and before the war Russian was the third most common language used on Steam. The market was reportedly worth $3.4B in 2021 (15th largest globally, with YoY growth around 14% before COVID-19 and the war). It had a growing consumer audience, highly skilled developers, and fairly widespread PC and Internet access enabled a dynamic homegrown game industry with global reach.

Large publishers and gaming services, like Playrix, ZeptoLab, Xsolla, and more were founded in Russia and initially served local gamers and developers before expanding internationally.

Market Size
Russia’s historic gaming revenues(in billions). Source: Allcorrect Games

After the war started in late February 2022, Russian players and gaming companies were cut off from the global industry due to sanctions and public pressure. International platforms like Steam and Google Play suspended game purchases and downloads, while publishers like EA pulled their content from the market and closed local offices. Russian gaming companies faced more difficult choices — either to ensconce themselves within the domestic market or to cut ties with it almost completely. 

Many, if not most, of the country’s leading companies chose the latter, and now position themselves as international companies, though with Russian-speaking leadership. While the decision to abruptly close domestic offices and exit the Russian market was forced upon these firms once the war began, the majority of these companies had already been distancing themselves from their country of origin.

Wargaming was founded in Belarus in 1998 but left for Cyprus in 2011; Playrix moved from Russia to Dublin in 2013, while ZeptoLab uprooted to Barcelona in 2015 and Nexters to Cyprus in 2016. Now, it seems, most of the country’s top companies and talent have decamped for warmer climates. As Yevgenia Korneeva, a Cyprus-based art manager at (formerly) Russian mobile publisher Nexters told The Washington Post, “all game development left Russia, and that amazing industry it had before Feb. 24 no longer exists.”

My.Games, publisher of War Robots and formerly the gaming arm of Russian social media platform VK, was already making 80% of its revenue outside of Russia before the war. It is now “100% focused on non-Russian markets” after being sold to Cyprus-based Russian VC Alexander Chachava and re-establishing itself in Amsterdam. 

Image Credit: My.Games

However, despite already operating internationally, the large-scale exit and reestablishment of Russia’s gaming industry abroad has not meant business-as-usual for these firms and others. The fundamental changes to Russia’s gaming ecosystem will have ripple effects throughout the industry. 

First, when it comes to talent, Russia’s loss is others’ gain. Cyprus was already an industry hotspot thanks to Russian and Ukrainian developers before the war, and it is now poised to become the epicenter of a highly entrepreneurial gaming community. Just as Helsinki, Montreal, and other cities grew into industry hubs over the past decades, the outflow of highly skilled talent from both Russia and Ukraine will spur new ecosystems. VC firms like GEM Capital and The Games Fund, who have Russian origins and connections within this community, will nurture a new cohort of startups from skilled founders fleeing the war. Emergent gaming ecosystems in Saudi Arabia, Turkey, and the UAE will also benefit from experienced talent entering the region. 

Investing in games from sunny Cyprus sure looks fun. Source: GEM Capital

Second, Russia’s domestic market is projected to continue growing, though it will do so without direct involvement from most global publishers. Though it took a significant tumble in 2022 (a contraction of 80% according to some estimates), consumer spending is expected to increase over time; but where will this demand go?

Piracy has always been relatively more common in Russia, and the removal of official channels for purchasing Western and Japanese games, coupled with economic and currency instability, are likely to accelerate this phenomenon. The sudden exit of most global publishers is an opportunity for publishers from the countries that have not sanctioned Russia: namely, China. Uncompetitive access to a single $3.4B market, with 80M gamers should be irresistible to the likes of Tencent (which is already acquiring local firms) and NetEase. Distribution and localization partnerships between the remaining domestic Russian gaming companies and Chinese publishers should be expected in the future.

And what of those remaining domestic companies? Despite the binary choice between exiting the country entirely or staying to focus on the Russian market, some lingering ties remain. Many publishers of Russian origin, who retained large staff in the country despite being officially headquartered elsewhere, described transferring their Russian operations to “local management.” While such maneuvers have split up companies into officially separate entities, room for discrete coordination may remain, such as the hiring of mocap actors in Moscow while being based in Cyprus.

In perhaps the most controversial case, Atomic Heart developer Mundfish (legally based in Cyprus, though founded in Russia) released the game domestically through publisher VK Play (the same VK which sold My.Games), with a global release from Focus Entertainment. Mundfish’s venture funding came from GEM Capital and Tencent, among others, and Mundfish has been criticized for hosting an extravagant release event for Russian press and promoting an idealized, pro-Russian vision of the Soviet era in Atomic Heart. 

Atomic Heart developer Mundfish, though based in Cyprus, held a lavish launch event for Russian journalists. Image credit: Sergey Mohov

Finally, the Russian state is interested in propping up its flagging gaming industry and potentially using it to advance the aims of the government. A short-lived proposal to fund a state-sponsored game engine, possibly due to the fear of developers losing access to Unity and Unreal via sanctions, died quickly.

Additional government deliberations have led to ideas about a publicly-funded games publisher pitched as a “Russian Electronic Arts” which could use games to project cultural soft power. Vladimir Putin himself has instructed his cabinet to look into boosting video game exports to the other BRICS countries. Of course, these initiatives are unlikely to go far or be very effective. But they do indicate state awareness of the importance of gaming to Russia’s tech economy, and perhaps a realization that the war has kneecapped one of the country’s most promising industries. 

Estimatesvary aroundthe immediate impact of the war and Russia’s future growth, but Statista seems optimistic - especially about mobile. Source: Statista Market Insights

Even in its defanged form, with most of the country’s highly skilled developers having decamped to Moscow on the Med or elsewhere, Russia’s domestic gaming ecosystem will not die; consumer demand for games remains, and Statista predicts a CAGR of 7% through 2030 (though this seems optimistic). New domestic entities will emerge, perhaps with state or Chinese support, to serve that audience and even reach international markets over time. 

However, the large publishers who left Russia as the war began and the individual Russians who emigrated are likely to leave their former compatriots behind as they get access larger markets, more sources of capital, and talented employees and colleagues. As these groups settle into new homes, the ripple effects will benefit the continued growth of gaming and game development globally.

Partners to the World's Tech Entrepreneurs

Lakestar is one of the leading pan-European venture capital firms. Lakestar’s mission is to find, fund, and grow disruptive businesses that are enabled by technology and founded by exceptional entrepreneurs in Europe and beyond. Founded by Klaus Hommels, the team’s early investments include Skype, Spotify, Facebook, and Airbnb. Since raising its first fund in 2012, Lakestar manages an aggregated volume of over €2.8 billion across both early and growth funds.

The team actively advises and supports portfolio companies in marketing, recruitment, technology, product development, and regulatory insight, accompanying founders from seed to early-stage, growth stage, or exit. Lakestar’s Games and Media team has made 18 investments, including in 1047 Games, Zebedee, Modulate, and Trace. 

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