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Uber is ending its uphill battle in Russia and merging with top competitor Yandex

Fighting a subsidy war against a native incumbent in an increasingly nationalistic region hasn’t worked again for the car-hailing giant.

Uber Releases Results Of Internal Sexual Harassment Investigation Photo by Spencer Platt/Getty Images

It’s been a costly and difficult three-and-a-half years since Uber launched its services in Russia’s capital city of Moscow. Facing off against an incumbent player called Yandex.Taxi, the U.S. based ride-hail company has been embroiled in a deep subsidy war — as it had been in China before it struck a deal there — to keep its prices lower than its competitor in the hope of increasing its market share.

That did not work.

So, now, Uber is ceding its control over its Russian operations to Yandex.Taxi — a company operated by a search firm that is often referred to as the “Google of Russia.” The two companies are forming a yet-to-be-named joint operation that Yandex will own the majority of with 59.3 percent control. Uber will own close to 37 percent of the new company and employees will own about four percent.

The why is fairly straightforward: Uber was losing, and badly. The annual run rate of the rides Yandex.Taxi was doing as of June 2017 was more than double that of Uber’s. That’s in spite of Uber’s persistent attempt to undercut Yandex’s prices. Based on data provided by Yandex, Uber did less than 12 million rides in June 2017, while Yandex.Taxi did close to 24 million.

That amounts to $47 million in gross bookings for Uber, while Yandex.Taxi saw $84 million in just that month.

There’s also the added difficulty in operating in Russia, nationalistic as it is, as a U.S.-based company. However, Uber had a few allies in the region, such as Russian billionaire Mikhail Fridman. Fridman heads up LetterOne, a fund based in Luxembourg, which put $200 million in Uber in 2016

The two companies’ market share combined, however, make the prospects for Uber much brighter since it won’t have to pour any more money into the region after this deal closes. Since Yandex.Taxi will be running the new organization, which also includes UberEats, Uber will be able to grow the value of its stake with little effort or operational costs.

Narrowing its losses continues to be the focus for Uber, given its current focus on profitability and a path to an initial public offering, which major shareholders have become concerned with after the ousting of the company’s CEO and co-founder Travis Kalanick.

Initially, Uber said it will be investing a big chunk of change into the new effort. According to a press release, the company’s head of business in the region, Pierre-Dimitri Gore-Coty, said Uber is investing $225 million in the new company on top of the $170 million the company already put into the region. It will value its stake at almost $1.4 billion.

Yandex and Uber annual rides and bookings

For Yandex.Taxi, which is investing $100 million in the new company, the deal essentially vanquishes the threat of a major competitor. It also gives the company access to two new revenue streams: UberEats and any additional revenue from a roaming agreement it struck with Uber as part of the deal.

That means Yandex.Taxi users will be able to hail an Uber in places like India and the U.S. using the Yandex app. Uber users will also be able to hail a Yandex.Taxi using the Uber app in places Yandex is available. It’s a roaming deal similar to what U.S. ride-hail rival Lyft attempted with China’s Didi and other regional competitors. That deal has since been dissolved.

“This is the largest ride-sharing roaming agreement in the world,” CEO of Yandex.Taxi and the new merged company Tigran Khudaverdyan said during a shareholder call.

This isn’t the first time Uber, valued at $69 billion, has backed out of a region. In 2016, Uber sold its China operations to Didi Chuxing for a nearly 20 percent stake in the newly merged company that was then valued at $35 billion.

The difference between the Didi deal and the Yandex deal, however, is that there are no Uber properties that are continuing to operate in China. Didi took over the whole business including the platform and rider and driver base. In Russia and nearby regions, Yandex will continue to operate Uber’s rider apps for the foreseeable future. The driver apps, however, will be combined.

With the Yandex deal, Uber will also be appointing three board members for this new company.

The two companies began working on the deal earlier this year, with the help of then-SVP of business Emil Michael and members of his team, sources told Recode. As the company continues to operate without key members like Michael and Kalanick, it’s unclear whether their replacements will be able to efficiently broker these major deals.

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