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TABLE OF CONTENTS
YANDEX N.V. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)    

o

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

OR

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

OR

o

 

SHELL COMPANY PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                  

Commission file number: 001-35173

YANDEX N.V.
(Exact name of Registrant as specified in its charter)

N/A
(Translation of Registrant's name in English)

The Netherlands
(Jurisdiction of incorporation or organization)

Schiphol Boulevard 165
Schiphol P7 1118 BG, The Netherlands
(Address of principal executive offices)



Arkady Volozh, Chief Executive Officer
Schiphol Boulevard 165
Schiphol 1118 BG, The Netherlands
Telephone: +31 20-206-6970
Facsimile: +31 20-446-6372
Email: askIR@yandex-team.ru
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)



             Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class   Name of each exchange on which registered
Class A Ordinary Shares   NASDAQ Global Select Market

             Securities registered or to be registered pursuant to Section 12(g) of the Act.    None

             Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. Class A Ordinary Shares

             Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the Annual Report.(1)

Title of each class   Number of shares outstanding
Class A   271,356,566
Class B   47,895,605

             Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o

             If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o    No ý

             Note—checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

             Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

             Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

             Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o

             Indicate by check mark which basis of accounting the registrant has used to prepared the financial statements included in this filing:

U.S. GAAP ý   International Financial Reporting Standards o
as issued by the International Accounting
Standards Board
  Other o

             If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o    Item 18 o

             If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

(APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

             Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o    No o

   


(1)
In addition, we had 10,804,582 Class A shares held in treasury and 12,000,000 Class C shares issued and fully paid as of December 31, 2015. Our Class C shares are issued from time to time solely for technical purposes, to facilitate the conversion of our Class B shares into Class A shares. They are held by a Conversion Foundation managed by members of our Board of Directors. For the limited period of time during which any Class C shares are outstanding, they will be voted in the same proportion as votes cast by holders of our Class A and Class B shares, so as not to influence the outcome of any vote.


Table of Contents


TABLE OF CONTENTS

 
   
  Page  

PART I.

 

 

       

Item 1.

 

Identity of Directors, Senior Management and Advisers

    N/A  

Item 2.

 

Offer Statistics and Expected Timetable

    N/A  

Item 3.

 

Key Information

    3  

Item 4.

 

Information on the Company

    43  

Item 4A.

 

Unresolved Staff Comments

    67  

Item 5.

 

Operating and Financial Review and Prospects

    67  

Item 6.

 

Directors, Senior Management and Employees

    95  

Item 7.

 

Major Shareholders and Related Party Transactions

    102  

Item 8.

 

Financial Information

    107  

Item 9.

 

The Listing

    108  

Item 10.

 

Additional Information

    109  

Item 11.

 

Quantitative and Qualitative Disclosures About Market Risk

    119  

Item 12.

 

Description of Securities other than Equity Securities

    N/A  

PART II.

 

 

   
 
 

Item 13.

 

Defaults, Dividend Arrearages and Delinquencies

    N/A  

Item 14.

 

Material Modifications to the Rights of Security Holders and Use of Proceeds

    120  

Item 15.

 

Controls and Procedures

    120  

Item 16A.

 

Audit Committee Financial Expert

    123  

Item 16B.

 

Code of Ethics

    123  

Item 16C.

 

Principal Accountant Fees and Services

    123  

Item 16D.

 

Exemptions from the Listing Standards for Audit Committees

    N/A  

Item 16E.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

    123  

Item 16F.

 

Change in Registrant's Certifying Accountant

    123  

Item 16G.

 

Corporate Governance

    124  

Item 16H.

 

Mine Safety Disclosure

    N/A  

PART III.

 

 

   
 
 

Item 17.

 

Financial Statements

     

Item 18.

 

Financial Statements

    F-1  

Item 19.

 

Exhibits

     



        In this Annual Report on Form 20-F (this "Annual Report"), references to "Yandex," the "company," "we," "us," or similar terms are to Yandex N.V. and, as the context requires, its wholly owned subsidiaries.

        Our consolidated financial statements are prepared in accordance with U.S. GAAP and are expressed in Russian rubles. In this Annual Report, references to "rubles" or "RUB" are to Russian rubles, and references to "U.S. dollars" or "$" are to United States dollars.

        Our fiscal year ends on December 31 of each year. References to any specific fiscal year refer to the year ended December 31 of the calendar year specified.

        This Annual Report includes market data reported by comScore (January 2016), Liveinternet.ru (March 2016), Public Opinion Foundation of Russia (FOM) (February 2016), ZenithOptimedia (December 2015), the Association of Russian Communication Agencies (AKAR) (March 2016) and the Russian Federal State Statistics Service (Rosstat) (January 2016). Our search market share in Turkey is based on comScore qSearch data (January 2016).

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Forward-Looking Statements

        This Annual Report contains forward-looking statements that involve risks and uncertainties. Words such as "project," "believe," "anticipate," "plan," "expect," "estimate," "intend," "should," "would," "could," "will," "may" or other words that convey judgments about future events or outcomes indicate such forward-looking statements. Forward-looking statements in this Annual Report may include statements about:

        The forward-looking statements included in this Annual Report are subject to risks, uncertainties and assumptions. Our actual results of operations may differ materially from those stated in or implied by such forward-looking statements as a result of a variety of factors, including those described under Part I, Item 3.D. "Risk Factors" and elsewhere in this Annual Report.

        We operate in an evolving environment. New risks emerge from time to time, and it is not possible for our management to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I.

Item 3.    Key Information.

A.    Selected Consolidated Financial and Statistical Data

        The selected consolidated statements of income data for the years ended December 31, 2013, 2014 and 2015 and the selected consolidated balance sheet data as of December 31, 2014 and 2015 are derived from our audited consolidated financial statements appearing elsewhere in this Annual Report. The selected consolidated balance sheet data as of December 31, 2011, 2012 and 2013 and consolidated statements of income data for the years ended December 31, 2011 and 2012 are derived from our audited consolidated financial statements that are not included in this Annual Report, after adjustment for the retrospective adoption of Accounting Standard Updates 2015-03 and 2015-17.

        Ruble amounts have been translated into U.S. dollars at a rate of RUB 72.8827 to $1.00, the official exchange rate quoted as of December 31, 2015 by the Central Bank of the Russian Federation. Such U.S. dollar amounts are not necessarily indicative of the amounts of U.S. dollars that could actually have been purchased upon exchange of Russian rubles at the dates indicated, and have been provided solely for the convenience of the reader. On March 17, 2016, the exchange rate was RUB 71.0256 to $1.00. See "Risk Factors—The depreciation of the Russian ruble has and may continue to materially adversely affect our business, financial condition and results of operations."

        The following selected consolidated financial data should be read in conjunction with our "Operating and Financial Review and Prospects" and our consolidated financial statements and the related notes appearing elsewhere in this Annual Report. Our financial statements are prepared in accordance with U.S. GAAP. These historical financial results are not necessarily indicative of the results to be expected in any future period.

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  Year ended December 31,  
 
  2011   2012   2013   2014   2015  
 
  RUB
  RUB
  RUB
  RUB
  RUB
  $
 
 
  (in millions, except share and per share data)
 

Consolidated statements of income data:

                                     

Revenues:

    20,033     28,767     39,502     50,767     59,792     820.4  

Operating costs and expenses:

                                     

Cost of revenues(1)

    4,707     7,188     10,606     14,336     16,810     230.6  

Product development(1)

    3,124     4,274     5,827     8,842     13,421     184.1  

Sales, general and administrative(1)

    3,294     4,900     6,537     7,782     11,601     159.3  

Depreciation and amortization

    1,874     2,951     3,695     4,484     7,791     106.9  

Goodwill impairment

                    576     7.9  

Total operating costs and expenses

    12,999     19,313     26,665     35,444     50,199     688.8  

Income from operations

    7,034     9,454     12,837     15,323     9,593     131.6  

Interest income

    222     1,002     1,717     856     1,744     23.9  

Other income, net(2)

    62     118     2,159     6,296     2,259     31.0  

Income before income taxes

    7,318     10,574     16,713     22,475     13,596     186.5  

Provision for income taxes

    1,545     2,351     3,239     5,455     3,917     53.7  

Net income

    5,773     8,223     13,474     17,020     9,679     132.8  

Net income per Class A and Class B share:

                                     

Basic

    18.30     25.21     41.25     53.30     30.39     0.42  

Diluted

    17.59     24.50     40.27     52.27     29.90     0.41  

Weighted average number of Class A and Class B shares outstanding:

                                     

Basic

    315,541,639     326,210,948     326,657,778     319,336,782     318,541,887     318,541,887  

Diluted

    328,155,087     335,690,596     334,571,212     325,610,277     323,713,437     323,713,437  

(1)
These amounts exclude depreciation and amortization expense, which is presented separately, and include share-based compensation expense of:

   
  2011   2012   2013   2014   2015  
   
  RUB
  RUB
  RUB
  RUB
  RUB
  $
 
 

Cost of revenues

    26     33     61     101     168     2.3  
 

Product development

    153     221     435     780     1,860     25.5  
 

Sales, general and administrative

    150     122     258     329     690     9.5  
(2)
A major component of other income, net is foreign exchange gains and losses generally resulting from changes in the value of the U.S. dollar compared with the Russian ruble. Because the functional currency of our operating subsidiaries in Russia is the Russian ruble, changes in the ruble value of these subsidiaries' monetary assets and liabilities that are denominated in other currencies (primarily U.S. dollar-denominated cash, cash equivalents and term deposits maintained in Russia) due to exchange rate fluctuations are recognized as foreign exchange gains or losses in our statement of

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    income. For example, in 2015, other income, net includes RUB 1,835 million of foreign exchange gains arising from the appreciation of the U.S. dollar compared to the Russian ruble in that year. In 2014, other income, net included a RUB 6,518 million gain arising from the appreciation of the U.S. dollar compared to the Russian ruble in that year. Although the U.S. dollar value of our U.S. dollar-denominated cash, cash equivalents and term deposits was not impacted by this appreciation, it resulted in an upward re-valuation of the ruble equivalent of these U.S. dollar-denominated monetary assets. Similarly, in periods where the U.S. dollar depreciates compared to the Russian ruble, we incur foreign exchange losses resulting from the downward revaluation of these assets. Other income, net also includes other non-operating gains and losses.

 
  As of December 31  
 
  2011   2012   2013   2014   2015  
 
  RUB
  RUB
  RUB
  RUB
  RUB
  $
 
 
  (in millions)
 

Consolidated balance sheet data(1):

                                     

Cash and cash equivalents

    5,930     7,425     33,394     17,645     24,238     332.6  

Term deposits (current and non-current)

    7,133     14,959     15,180     31,526     33,549     460.3  

Total assets

    33,910     43,938     70,769     94,594     111,818     1,534.2  

Total current liabilities

    4,711     6,678     6,899     9,791     11,669     160.1  

Total non-current liabilities(2)

    246     213     17,273     29,067     30,052     412.3  

Total shareholders' equity

    28,953     37,047     46,597     55,736     70,097     961.8  

(1)
Prior periods have been reclassified to reflect current period presentation. Balances related to assets held for sale (note 4 to our consolidated financial statements) are reclassified from their historical presentation to assets held for sale and liabilities related to assets held for sale. Balances related to convertible debt issuance costs are reclassified for the retrospective adoption of Accounting Standard Update 2015-03 related to the presentation of deferred debt issuance costs. Balances related to deferred tax assets and liabilities are reclassified for the retrospective adoption of Accounting Standard Update 2015-17 related to the presentation of deferred taxes as non-current.

(2)
The total non-current liabilities as of December 31, 2013, 2014 and 2015 mainly result from our convertible bond offering. Please refer to note 11 to our consolidated financial statements.

Exchange Rate Information

        Our business is primarily conducted in Russia and almost all of our revenues are denominated in Russian rubles. We have presented our most recent annual results of operations in U.S. dollars for the convenience of the reader. Unless otherwise noted, all conversions from RUB to U.S. dollars and from U.S. dollars to RUB in this Annual Report were made at a rate of RUB 72.8827 to $1.00, the official exchange rate quoted by the Central Bank of the Russian Federation as of December 31, 2015. On March 17, 2016, the exchange rate was RUB 71.0256 to $1.00. Such U.S. dollar amounts are not necessarily indicative of the amounts of U.S. dollars that could actually have been purchased upon exchange of Russian rubles at the dates indicated.

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        The following table presents information on the exchange rates between RUB and the U.S. dollar for the periods indicated as quoted by the Central Bank of the Russian Federation:

 
  RUB per U.S. dollar  
Period
  Period-end   Average   Low   High  

2011

    32.20     29.39     32.68     27.26  

2012

    30.37     31.09     34.04     28.95  

2013

    32.73     31.85     33.47     29.93  

2014

    56.26     38.42     67.79     32.66  

2015

    72.88     60.96     72.88     49.18  

September 2015

    66.24     66.77     68.79     65.35  

October 2015

    64.37     63.09     65.94     61.15  

November 2015

    66.24     65.03     66.63     63.40  

December 2015

    72.88     69.68     72.88     66.26  

January 2016

    75.17     76.31     83.59     72.93  

February 2016

    75.09     77.23     79.50     75.09  

March 2016 (through March 17)

    71.03     72.32     75.90     70.15  

        See "Risk Factors—The depreciation of the Russian ruble has and may continue to materially adversely affect our business, financial condition and results of operations" for a discussion of the foreign currency exchange rate risks and uncertainties our business faces.

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B.    Risk Factors

        Investing in our Class A shares involves a high degree of risk. The risks and uncertainties described below and elsewhere in this Annual Report, including in the section headed "Operating and Financial Review and Prospects", could materially adversely affect our business. These are not the only risks that we face; additional risks and uncertainties of which we are unaware, or that we currently deem immaterial, may also become important factors that affect us. Any of these risks could adversely affect our business, financial condition and results of operations. In such case, the trading price of our Class A shares could decline.

Risks Related to the Russian Economy

Geopolitical and macroeconomic events have adversely affected and created uncertainty and instability in the Russian economy, which could harm our business, financial condition and results of operations.

        In 2014 and 2015, Russia has experienced an economic downturn that has been characterized by substantial depreciation of its currency, sharp fluctuations of interest rates, a decline in the gross domestic product in 2015 and forecasted further decline in 2016, a decline in disposable income, a steep decline in the value of shares traded on its stock exchanges, and a material increase in the inflation rate. The Russian economy is particularly sensitive to the price of oil, and recent substantial decreases in oil prices have adversely affected and may continue to adversely affect its economy. In addition, international sanctions have been imposed on identified parties and business sectors in Russia in connection with the geopolitical situation in Ukraine, as described below. See "—The current geopolitical conflict in Ukraine and related international economic sanctions may continue to adversely affect the Russian economy and the value of investments in Russia, and could harm our business, financial condition and results of operations."

        In 2015, the Russian ruble depreciated against the US dollar by 23%. See "—The depreciation of the Russian ruble has and may continue to materially adversely affect our business, financial condition and results of operations."

        On December 11, 2014, the Central Bank of Russia raised its key rate to 10.5%, followed by a further sharp increase on December 16, 2014 to 17%. During 2015 the rate was gradually lowered to 11% as of December 31, 2015. Further volatility of interest rates may adversely affect our ability to borrow funds if necessary or desirable, and may adversely affect the spending decisions of both advertisers and consumers.

        On January 26, 2015, the global credit ratings agency Standard & Poor's lowered its long- and short-term foreign currency sovereign credit ratings on the Russian Federation to non-investment grade BB+ from investment grade BBB–. On December 3, 2015, Moody's Investors Service changed the outlook on Russia's Ba1 government bond rating to stable from negative and affirmed Russia's government bond rating as Ba1/Not Prime. Moody's further affirmed that Russia's foreign currency bank deposits and long term local currency debt and deposits remained unchanged at Ba2/Not Prime and Baa3, respectively. Fitch Ratings, the only remaining large credit rating agency to do so, still rates Russia in the investment grade category, albeit at the lowest possible level in this rating and with a negative outlook. The outlook for long-term ratings is considered negative. Further declines in the oil price or other deterioration of the geopolitical situation may lead to further depreciation of the ruble and may lead to the Russia's sovereign credit rating being further downgraded by credit agencies.

        The slowdown of the Russian economy in recent periods has adversely affected our results of operations. The medium-term outlook for the Russian economy is unsettled, and continued deterioration of the economic situation would likely further adversely affect the profitability of our business. As a result of the current economic instability and any further potential deterioration in the Russian economy, total advertising spending in Russia may decrease which, in turn, could materially adversely affect our operating results. See "—We generate almost all of our revenues from advertising,

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which is cyclical in nature, and any reduction in spending by or loss of advertisers would materially adversely affect our business, financial condition and results of operations."

The current geopolitical conflict in Ukraine and related international economic sanctions may continue to adversely affect the Russian economy and the value of investments in Russia, and could harm our business, financial condition and results of operations.

        Significant uncertainty exists surrounding the current geopolitical situation in Ukraine. The United States, the European Union and certain other countries have imposed economic sanctions on certain Russian government officials, private individuals and Russian companies, as well as "sectoral" sanctions affecting specified types of transactions with named participants in certain industries, including named Russian financial institutions, and sanctions that prohibit most commercial activities of U.S. and E.U. persons in Crimea and Sevastopol. There is significant uncertainty regarding the extent or timing of any potential further economic or trade sanctions, or the ultimate outcome of the Ukrainian crisis. Political and economic sanctions may affect the ability of our international customers to operate in Russia, which could negatively impact our revenue and profitability. Sanctions could also impede our ability to effectively manage our legal entities and operations in and outside of Russia. We are domiciled in the Netherlands, while our wholly owned principal operating subsidiary is organized under the laws of the Russian Federation, and several of our other subsidiaries are incorporated in other countries that have imposed economic sanctions on the Russian Federation. Although neither our parent company nor our principal operating subsidiary or other subsidiaries are targets of sanctions, our business has been adversely affected by the impact of sanctions on the broader economy in Russia. In addition, Yandex.Money, our joint venture with Sberbank, is subject to U.S. sectoral sanctions due to Sberbank owing 75% (less one ruble) of the total participation interest in PS Yandex.Money LLC.

        Political, civil or military conflicts between Russia and other countries could also negatively affect economies in the region, including the Russian economy. This, in turn, may result in a general lack of confidence among international investors in the region's economic and political stability and in Russian investments generally. Along with potential official government sanctions on Russia, U.S. and foreign investors may be pressured to reduce or withdraw their investments in Russia. Such circumstances may result in trading volatility, reduced liquidity and significant declines in the price of listed securities of companies with significant operations in Russia, including our Class A shares.

The depreciation of the Russian ruble has materially adversely affected and may continue to materially adversely affect our business, financial condition and results of operations.

        The value of the Russian ruble has declined materially against the U.S. dollar in recent periods and is currently subject to substantial volatility. The exchange rate of the Russian ruble as quoted by the Central Bank of Russia dropped from RUB 56.3 to $1.00 as of December 31, 2014 to RUB 72.9 to $1.00 as of December 31, 2015 and to a new historical low of RUB 83.6 to $1.00 at closing on January 22, 2016. The rate was RUB 71.03 to $1.00 on March 17, 2016.

        Although our revenues and expenses are both primarily denominated in Russian rubles, the majority of our rent expenses, including the lease for our Moscow headquarters, are denominated in U.S. dollars. In February 2016 we announced our intention to acquire the office complex in which our Moscow headquarters is located. Our expenses related to the development of our business internationally are often denominated in U.S. dollars, Euros or other local currencies. Additionally, a major portion of our capital expenditures, primarily for servers and networking equipment, although payable in rubles, is for imported goods and therefore can be materially affected by changes in the value of the ruble. Moreover, the consideration we have paid in connection with a number of our acquisitions of other businesses to date has been, and future acquisition consideration may be, denominated and paid in U.S. dollars. In addition, since most of our personnel expenses are denominated in rubles, we may have to increase our personnel expenses in order to better compete

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with other companies which denominate their personnel expenses in U.S. dollars, Euros or other currencies which appreciated in relation to the Russian ruble. If the Russian ruble were to experience a prolonged and significant decline in value against foreign currencies, we could face material foreign currency exchange exposure, which may materially adversely affect our business, financial condition and results of operations. See "Operating and Financial Review and Prospects—Quantitative and Qualitative Disclosures about Market Risk" and "—Our planned acquisition of the office complex in which our Russian headquarters is located in central Moscow will increase our indebtedness and will create new operational and management challenges for our business".

Risks Related to Our Business and Industry

We face significant competition from major global and Russian internet companies, including Google and Mail.ru, which could negatively affect our business, financial condition and results of operations.

        We face strong competition in various aspects of our business from global and Russian companies that provide internet search and other online services and content. Currently, we consider our principal competitors to be Google and Mail.ru.

        Of the large global internet companies, we consider Google to be our principal competitor in the market for desktop and mobile internet search, and for text-based advertising, online advertising network revenues, advertising intermediary services, distribution arrangements and other services. According to Liveinternet.ru, Google's share of the Russian search market, based on search traffic generated, was 34.5% for the full year 2015, compared with our market share of 57.6%. Google conducts extensive online and offline advertising campaigns in Russia. In recent periods, Google has aggressively marketed its Chrome browser in which its search engine is the default search function, leading to increased competition.

        With Android, its popular mobile platform, Google exerts significant influence over the increasingly important market for mobile and location-based search and advertising, including through its global arrangements with manufacturers of mobile devices and network operators to preinstall on an exclusive basis a set of Google's mobile applications. See also "—The competition to capture market share on mobile devices is intense and if we are not successful in offering, achieving substantial reach among users and monetizing search and other services on mobile devices, our business, financial condition and results of operations could be adversely affected." We expect that Google will continue to use its brand recognition and global financial and engineering resources to compete aggressively with us. In addition to Google, we also face competition, albeit less intense, from the Russian and international websites of Microsoft and Yahoo!

        On the domestic side, our principal competitor is Mail.ru. Although we power paid search on Mail.ru properties, we also compete with Mail.ru in the market for display advertising and other services. Mail.ru offers a wide range of internet services, including the most popular Russian web mail service, and many other services that are comparable to ours. Mail.ru's search market share was 7.3% and 6.3% in the full years 2014 and 2015. We also compete with Russian online advertising networks, such as Begun, which serve advertising to a number of popular Russian websites.

        Although we have partnerships with a number of social networking sites and serve ads on some of these sites, we also view them as increasingly significant competitors. Such sites provide users with a wide range of information and services similar to those we offer, including search, real-time news and location-based information and updates. These sites derive a substantial portion of their revenues from online advertising and are experimenting with innovative ways of monetizing user traffic. In light of their large audiences and the significant amount of information they can access and analyze regarding their users' needs, interests and habits, we believe that they may be able to offer highly targeted advertising that could create increased competition for us. The popularity of such sites may also reflect a growing shift in the way in which people find information, get answers and buy products, which may

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create additional competition to attract users. We also compete with other destination websites, which are sites that users access primarily for content rather than search, that seek to increase their search-related traffic, as well as established companies and start-ups that are developing search technologies and other internet services.

        We cannot guarantee that we will be able to continue to compete effectively with current and future internet companies that may have greater ability to attract and retain users, greater name recognition, more personnel and greater financial and other resources. If our competitors are successful in providing similar or better search results and other internet services compared with those we offer, we could experience a significant decline in user traffic. Any such decline in traffic could negatively affect our business, financial condition and results of operations.

The competition to capture market share on mobile devices is intense and if we are not successful in achieving substantial reach among users and monetizing search and other services on mobile devices, our business, financial condition and results of operations could be adversely affected.

        Users are increasingly accessing the internet through mobile and other devices rather than desktop and laptop personal computers, including through mobile phones, smartphones, wearable devices, and handheld computers such as netbooks and tablets, as well as through video game consoles and television set-top devices. Such devices have different characteristics than desktop and laptop personal computers (including screen size, operating system, user interface and use patterns). Tailoring our products and services to such devices requires particular expertise and the expenditure of significant resources. The versions of our products and services developed for these devices, including the advertising solutions we offer, may be less attractive to users, advertisers, manufacturers or distributors of devices than those offered by our competitors or than our desktop offerings. The percentage of our total search traffic that was generated from mobile devices increased from approximately 24% in the fourth quarter of 2014 to approximately 27% in the fourth quarter of 2015, while the percentage of our search revenues generated from mobile devices increased from approximately 18% to approximately 22% between those periods.

        Each manufacturer or distributor may establish unique technical standards for its devices, and as a result our products and services may not work or be viewable on these devices. Some manufacturers may also elect not to include our products on their devices, or may be prohibited from doing so pursuant to their agreements with other parties.

        In February 2015, we made a formal request to the Russian Federal Antimonopoly Service ("FAS") to open an investigation into whether Google is using its dominant position to promote its search and other services bundled into a single package for pre-installation by device manufacturers, as well as employing exclusive dealing and other restrictive practices to increase its search market share and ensure ubiquity of its other services on Android-operated devices. Our share of searches on the Android platform in Russia decreased from approximately 44% in the fourth quarter of 2014 to approximately 40% in the fourth quarter of 2015. The FAS has conducted an investigation based on our request and in September 2015 concluded that Google had breached Russian antitrust laws. FAS instructed Google to refrain from anti-competitive behavior and to take action to restore competition. In December 2015 Google appealed FAS's decision to the Arbitrazh Court of Moscow. In March 2016 the appeal was dismissed. The possibility of a further appeal remains, however, and there is no assurance that following a final decision of FAS we will succeed in maintaining or materially increasing our market share on mobile devices.

        In addition, consumers are increasingly accessing content directly via "apps" tailored to particular mobile devices or in closed social media platforms, which could affect our share of the search market over time. As new devices and platforms are continually being released, it is difficult to predict the challenges we may encounter in adapting our products and services and developing competitive new

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products and services. See also "—As the internet evolves, an increasing amount of online content may be held in closed social networks or stored in proprietary document formats, which may limit the effectiveness of our search technology, which could adversely affect our brand, business, financial condition and results of operations."

        We expect to continue to devote significant resources to the creation, support and maintenance of mobile products and services. If we are unable to attract and retain a substantial number of device manufacturers, distributors and users to our products and services, or if we are slow to develop products and technologies that are more compatible with such devices and platforms, we will fail to capture the opportunities available as consumers and advertisers transition to a dynamic, multi-screen environment. Furthermore, given the importance of distribution and application pre-installation arrangements with the most popular device manufacturers for successful operation of our business, failure to reach such arrangements may adversely affect our business, financial condition and results of operations.

We generate almost all of our revenues from advertising, which is cyclical in nature, and any reduction in spending by or loss of advertisers would materially adversely affect our business, financial condition and results of operations.

        In the past three years, we generated on average more than 98% of our revenues from advertising. Expenditures by advertisers tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns, and can therefore fluctuate significantly. As a result of the current economic slowdown, the rate of growth in online advertising expenditures slowed in 2015, down from a growth rate of 18% from 2013 to 2014 to 15% from 2014 to 2015. In 2016, Zenith Optimedia forecasts online advertising expenditures to grow by 10%. The table below provides annual online and total advertising expenditures in Russia from 2010 to 2015:

 
  2010   2011   2012   2013   2014   2015  
 
  (RUB in billion)
 

Online advertising expenditures

    26.7     41.8     56.3     71.7     84.6     97.0  

Growth rate

    40 %   57 %   35 %   27 %   18 %   15 %

Total advertising expenditures

    250.0 *   263.4     297.8     327.8     340.1     307.5  

Growth rate

    16 %   5 %   13 %   10 %   4 %   (10 )%

*
AKAR's revised estimates of the advertising expenditures for historical periods.

        Although forecasts for online advertising spending in Russia indicate sustained annual growth through 2018, we anticipate that the rate of such growth will decelerate. Any decreases or delays in online advertising spending due to economic conditions, or otherwise, would materially adversely impact our business, financial condition and results of operations. Additionally, recent decreases in international oil prices may continue to adversely affect the Russian economy. The current economic slowdown in Russia, and any further potential deterioration, may adversely affect total advertising spending in Russia, which, in turn, would materially adversely affect our operating results for 2016 and in the medium-term. See also "—Geopolitical and macroeconomic events have adversely affected and created uncertainty and instability in the Russian economy, which could harm our business, financial condition and results of operations."

Distribution arrangements with third parties are an important avenue for expanding our user base, and any failure to obtain or maintain such relationships on reasonable terms could have an adverse effect on our business, financial condition and results of operations.

        To expand our user base and increase traffic to our sites and mobile applications, we enter into arrangements with leading software companies and device manufacturers for the distribution of our

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services and technology. In particular, we have agreements, on a co-marketing basis, with certain internet browsers. As new methods for accessing the internet become available, including through new digital platforms and devices, we may need to enter into new or amended distribution agreements. See also "—The competition to capture market share on mobile devices is intense and if we are not successful in offering, achieving substantial reach among users and monetizing search and other services on mobile devices, our business, financial condition and results of operations could be adversely affected."

        Our most significant distribution partners in 2015 were Opera, which offers mobile and desktop browsers, and where Yandex is the default search in certain search entry points; Mozilla, which includes our search as the default in its Firefox browser; and Microsoft, which offers our search as the default homepage and search tool in Microsoft Edge and Internet Explorer running on the Windows 10 operating system for users in Russia, Belarus, Kazakhstan, Ukraine and Turkey. If we are unable to continue our arrangements with Opera, Mozilla or Microsoft, or enter into comparable arrangements with new distribution partners, particularly for the distribution of our search and other services on mobile devices, this would likely have a negative effect on our search market share over time. In the future, existing and potential distribution partners may not offer or renew distribution arrangements on reasonable terms for us, or at all, which could limit our ability to maintain and expand our user base, and could have a material adverse effect on our business, financial condition and results of operations.

Our users can switch at any time to our competitors at no cost. If we do not continue to innovate and provide services that are useful and attractive to our users, we may be unable to retain them and may become less attractive to our advertisers, which could adversely affect our business, financial condition and results of operations.

        Our success depends on providing search and other services that make using the internet a more useful and enjoyable experience for our users. Our competitors continuously develop innovations in search and other services, as well as online advertising services. As search technology continues to develop, our competitors may be able to offer search capabilities that are, or that are seen to be, substantially similar to or better than ours. This may force us to compete in different ways and expend significant resources to remain competitive.

        If we are unable to continue to develop and provide our users with quality, up-to-date services, and to appropriately time them with market opportunities, or if we are unable to maintain the quality of such services, our user base may not grow, or may decline. Further, if we are unable to attract and retain a substantial share of internet traffic generated by mobile and other digital devices, or if we are slow to develop services and technologies that are compatible with such devices, our user base may not grow or may decline.

        If our users move to our competitors, we will also become less attractive to advertisers and therefore to Yandex ad network partners. This could adversely affect our business, financial condition and results of operations.

We expect the rate of growth of our revenues to be lower in the future and we may experience downward pressure on our operating margin.

        The effectiveness of text-based advertising as a medium has contributed to the rapid growth of our business since our inception. Advertising spending continues to shift from offline to online as the internet evolves and we expect that our business will continue to grow and further benefit from that shift. However, we expect that our revenue growth rate will continue to decline over time as a result of a number of factors, including continuing macroeconomic challenges in Russia, challenges in maintaining our growth rate as our revenues increase to higher levels, increasing competition, changes

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in the nature of queries, the evolution of the overall online advertising market and the declining rate of growth in the number of internet users in Russia as overall internet penetration increases.

        Other factors which may cause our operating margin to fluctuate or decline are:

        See "Operating and Financial Review and Prospects—Key Trends Impacting Our Results of Operations."

As the Russian internet market matures, our future expansion will increasingly depend on our ability to generate revenues from new business models or in other markets.

        As internet usage has spread in Russia, the rate of growth in the number of internet users has been declining. The number of users increased by 17% from 2010 to 2011, 12% from 2011 to 2012, 9% from 2012 to 2013, 9% from 2013 to 2014, and 8% from 2014 to 2015 (autumn periods), according to the Public Opinion Foundation of Russia, or FOM. As our core market matures, we will need to provide new services, further exploit non-core business models, such as e-commerce, or expand into new geographic markets in order to continue to grow our revenues at previously achieved levels. In 2015 we commenced the carve-out of certain of our services (Taxi and Classifieds) into newly created subsidiaries (business units) spun off from our main operating subsidiary, in order to provide greater strategic and operational focus for these units. Our efforts in this regard may not be successful, which would adversely affect our business, financial condition and results of operations. In particular, the spin-off of certain business units may cause the loss of some of our clients, or disruption in the

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provision of the services that are being carved out, and may require additional attention from our management.

We rely on our Yandex ad network partners for a material portion of our revenues and benefit from our relationships with them. If we lose these partners, or the quality of these partners decreases, it would adversely affect our business, financial condition and results of operations.

        Revenues from advertising on our ad network partner websites represented 26.0% of our text-based and display advertising revenues in 2015 and 23.7% in 2014. This increase was driven by addition of new advertising partners to our ad network as well as by improved targeting capabilities, which we introduced in the first half of 2015. We consider our ad partner network to be important for the continued growth of our business. Our agreements with our network partners, other than our agreement to power paid search results on Mail.ru, are generally terminable at any time without cause. Our competitors could offer more favorable terms to our current or potential network partners, including guaranteed minimum revenues or other more advantageous revenue-sharing arrangements, in an effort to take market share away from us. Additionally, some of our partners in the Yandex ad network, such as Mail.ru and Microsoft Bing, compete with us in one or more areas and may terminate their agreements with us in order to develop their own businesses. If our network partners decide to use a competitor's advertising services, our revenues would decline.

        Many of our key network partners operate high-profile websites, and we derive tangible and intangible benefits from this affiliation, such as increased numbers of users, extended brand awareness and greater audience reach for our advertisers. If our agreements with any of these partners are terminated or not renewed and we do not replace those agreements with comparable agreements, our business, financial condition and results of operations would be adversely affected.

        The number of paid clicks and amount of revenues that we derive from our partners in the Yandex ad network depends on, among other factors, the quality of their websites and their attractiveness to users and advertisers. Although we screen new applicants, favor websites with high-quality content and stable audiences, and strive to monitor the quality of the network partner websites on an ongoing basis, these websites are operated by independent third parties that we do not control. If our network partners' websites deteriorate in quality or otherwise fail to provide interesting and relevant content and services to their users, this may result in reduced attractiveness to their users and our advertisers, which may adversely impact our business, financial condition and results of operations.

Our business depends on a strong brand, and failing to maintain and enhance our brand would harm our ability to expand our base of users, advertisers and network partners and would materially adversely affect our business, financial condition and results of operations.

        We believe that the brand identity that we have developed through the strength of our technology and our user focus has significantly contributed to the success of our business. We also believe that maintaining and enhancing the Yandex brand, including through continued significant marketing efforts, is critical to expanding our base of users, advertisers, advertising network partners, and other business partners. Maintaining and enhancing our brand, especially in relation to mobile services, will depend largely on our ability to continue to be a technology leader and a provider of high-quality, reliable services, which we may not continue to do successfully.

        Our Yandex.Money business now operates through a joint venture with Sberbank. Although we have sought to implement appropriate controls and protections, as the minority partner in this legal entity we may have limited ability to ensure that the business is always operated in a manner that is consistent with the broader Yandex brand.

        Our carve-out of certain of our services into newly created subsidiaries (business units) in 2015 may also require additional efforts in order to maintain consistent use of our brand.

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        If we or our joint venture partner fail to maintain and enhance the Yandex brand, or if we incur excessive expenses in our efforts to do so, our business, financial condition and results of operations would be materially adversely affected.

We spend significant resources expanding and enhancing our service offerings, and if these new or enhanced services are not widely adopted by users, our business, financial condition and results of operations could be adversely affected.

        We continuously work to develop new and enhanced services to broaden and improve the overall quality of our service offerings. The cost we incur in these efforts, both in terms of product development expenses and advertising and marketing costs, can be significant. If our new or enhanced services are not widely adopted by users, our business, financial condition and results of operations could be adversely affected.

If we fail to manage effectively the growth of our operations, our business, financial condition and results of operations could be adversely affected.

        We have experienced, and continue to experience, growth in our operations, which has placed, and will continue to place, significant demands on our management and our operational and financial infrastructure. In addition, in the current macroeconomic environment we have made reductions in our staff and may further reduce or limit the expansion of our staff, which would require us to manage our operational growth with fewer people. In order to streamline the growth of certain of our services we commenced their carve-out into newly created subsidiaries (business units) separate from our main operating subsidiary. Completion of this process will require additional administrative effort. We have limited operational, administrative and financial resources, which may be inadequate to sustain the growth we seek to achieve. If we do not effectively manage our growth, the quality of our services could suffer, which could adversely affect our brand, business, financial condition and results of operations.

        As our user and advertiser bases expand, we will need to continue to increase our investment in technology, infrastructure, facilities and other areas of operations, in particular product development, sales and marketing. As a result of such growth, we will also need to continue to improve our operational and financial systems and managerial control and procedures. We will have to maintain close coordination among our technical, accounting, finance, marketing and sales personnel. If the improvements are not implemented successfully, our ability to manage our growth will be impaired and we may have to make significant additional expenditures, which could harm our business, financial condition and results of operations.

Our planned acquisition of the office complex in which our Russian headquarters is located in central Moscow will increase our indebtedness and will create new operational and management challenges for our business.

        In February 2016, we signed a definitive agreement pursuant to which we will become the sole owner of a newly-created company that will hold title to the office complex in central Moscow that houses our Russian headquarters. The complex is spread across approximately 4 hectares and includes 7 buildings with around 80,000 square-meters of Class A and B office space, 65% of which is currently occupied by us. We will continue to lease a portion of the space to third-party tenants in the medium-term, while securing access to additional space for long-term growth as we expand. Although we intend to outsource the management of the complex to a property services company, this transaction will create new operational and management challenges in a field outside of our core business, and will expose us to the risks inherent in being a landlord.

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        As consideration for the acquisition, we will issue 12,900,000 new Class A ordinary shares to the seller and will assume approximately $490 million of debt at closing, denominated in U.S. dollars. Although we currently intend to repay a portion of this debt at closing out of existing cash, our overall indebtedness will increase materially as a result of this transaction. The closing of the transaction remains subject to certain conditions, including required regulatory approvals, and is anticipated to occur in the second half of 2016. We can provide no assurance that the transaction will ultimately close, or that it will produce the financial benefits that we currently expect.

Our corporate culture has contributed to our success, and if we cannot maintain the focus on teamwork and innovation fostered by this environment, our business, financial condition and results of operations would be adversely affected.

        We believe that a critical contributor to our success has been our corporate culture, which values and fosters teamwork and innovation. As our business matures, and we are required to implement more complex organizational management structures, we may find it increasingly difficult to maintain the beneficial aspects of our corporate culture. Our carve-out of certain of our services into newly created subsidiaries (business units) in 2015 was intended in part to enhance this aspect of our corporate culture. Failure to maintain the benefits of this culture would adversely affect our business, financial condition and results of operations.

The loss of any of our key personnel or a failure to attract, retain and motivate qualified personnel, may have a material adverse effect on our business, financial condition and results of operations.

        Our success depends in large part upon the continued service of key members of our management team and technical personnel, as well as our continued ability to attract, retain and motivate other highly qualified engineering, programming, technical, sales, customer support, financial and managerial personnel.

        Although we attempt to structure employee compensation packages in a manner consistent with the evolving standards of the markets in which we operate and to provide incentives to remain with Yandex, including equity awards under our employee incentive plan, we cannot guarantee that we will be able to retain our key employees. A number of our senior employees exercised share options in connection with our initial public offering and made significant gains, while a significant portion of our outstanding equity awards held by key employees have become, or will soon become, substantially vested. Although we grant additional equity awards to management personnel and other key employees from time to time, employees may be more likely to leave us after their initial award fully vests, especially if our shares have significantly appreciated in value relative to the exercise price. Depreciation of the market value of our shares could also make such equity awards less effective in retaining our key employees, especially for options issued above the current trading price. If any member of our senior management team or other key personnel should leave our group, our ability to successfully operate our business and execute our business strategy could be impaired. We may also have to incur significant costs in identifying, hiring, training and retaining replacements for departing employees.

        The competition for software engineers and qualified personnel who are familiar with the internet industry in Russia is intense. We may encounter difficulty in hiring and/or retaining highly talented software engineers to develop and maintain our services. There is also significant competition for personnel who are knowledgeable about the accounting and legal requirements related to a NASDAQ listing, and we may encounter particular difficulty in hiring and/or retaining appropriate financial staff needed to enable us to continue to comply with the internal control requirements under the Sarbanes-Oxley Act and related regulations.

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        Any inability to successfully retain key employees and manage our personnel needs may have a material adverse effect on our business, financial condition and results of operations.

Growth in our operations internationally may create increased risks that could adversely affect our business, financial condition and results of operations.

        We have limited experience with operations outside Russia, and in 2015 derived only approximately 8.5% of our revenues from advertisers outside Russia. Part of our future growth strategy is to expand our operations geographically on an opportunistic basis. Our geographic expansion efforts generally require the expenditure of significant costs in the new geography prior to achieving the market share necessary to support the commercialization of our services, which allows us to begin generating revenues in the new geography. For example, in 2011 we launched operations in Turkey. In January 2016, our share of the desktop search market in Turkey was 6.6% according to comScore qSearch, and we have generated only nominal revenues there to date. Our ability to manage our business and conduct our operations across a broader range of geographies will require considerable management attention and resources and is subject to a number of risks relating to international markets, including the following:

        In addition, compliance with complex and potentially conflicting foreign and Russian laws and regulations that apply to our international operations may increase our cost of doing business and may interfere with our ability to offer, or prevent us from offering, our services in one or more countries. These numerous laws and regulations include import and export requirements, content requirements, trade restrictions, tax laws, economic sanctions, internal and disclosure control rules, data protection, data retention, privacy and filtering requirements, labor relations laws, U.S. laws, such as the Foreign Corrupt Practices Act, and local laws prohibiting corrupt payments to governmental officials. Violations of these laws and regulations may result in fines; criminal sanctions against us, our officers, or our employees; prohibitions on the conduct of our business; and damage to our reputation. Although we have implemented policies and procedures designed to ensure compliance with these laws, we cannot assure you that our employees, contractors or agents will not violate our policies. Any such violations may result in prohibitions on our ability to offer our services in one or more countries, and may also

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materially adversely affect our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, and our business, financial condition and results of operations.

Financial results for any particular period are not necessarily indicative of results for future periods.

        Our historical results of operations may not be useful in predicting our future results. Our results of operations may fluctuate from period to period as a result of any of the risk factors described in this Annual Report and, in particular, due to:

Due to the seasonal nature of advertising spending, our future results of operations may fluctuate from period to period and from quarter to quarter, which may cause our share price to decline.

        Advertising spending and user traffic tend to be seasonal, with internet usage, advertising expenditures and traffic historically slowing down during the months, when there are extended Russian public holidays and vacations, and increasing significantly in the fourth quarter of each year. For these reasons, comparing our results of operations on a period-to-period basis may not be meaningful, and past results should not be relied upon as an indication of future performance. Quarterly and annual expenses as a percentage of revenues may be significantly different from historical or projected rates and may fall below market expectations in a given period, which may cause our share price to decline.

Any decline in the internet as a significant advertising platform in the countries in which we operate could have a material adverse effect on our business, financial condition and results of operations.

        We generate almost all our revenues from the sale of online advertising in Russia. Although the use of the internet as a marketing channel in Russia is maturing, the level of overall spending on advertising in Russia remains relatively low compared to that in other developed countries. Broadband penetration rates in Russia are also relatively low compared to those in some other developed countries. The internet competes with traditional advertising media, such as television, print, radio and outdoor advertising. Although advertisers have become more familiar with online advertising in recent years, some of our current and potential customers have limited experience with online advertising, and have not historically devoted a significant portion of their marketing budgets to online marketing and promotion. As a result, they may be less inclined to consider the internet effective in promoting their products and services compared with traditional media.

        Any decline in the appeal of the internet generally in Russia or the other countries in which we operate, whether as a result of increasing governmental regulation of the internet, the growth in popularity of other forms of media, a decline in the attractiveness of the internet as an advertising medium or any other factor, could have a material adverse effect on our business, financial condition and results of operations.

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Index spammers could harm the integrity of our search results, which may adversely affect our business.

        So-called "index spammers" seek to develop ways to manipulate internet search results. For example, because our search technology ranks a webpage's relevance based in part on the importance of the websites that link to it, people have attempted to link groups of websites together to manipulate search results. Although we constantly innovate to develop our search technologies to direct users to relevant information, we may be unable to counter such disruptive activity. If our efforts to combat these and other types of index spamming are unsuccessful, our reputation for delivering relevant results could be harmed. This could result in a decline in user traffic, which may adversely affect our business, financial condition and results of operations.

If our security measures are breached, malicious applications interfere with or exploit security flaws in our services, or our services are subject to attacks that degrade or deny the ability of users to access our products and services, our products and services may be perceived as not being secure, users and customers may curtail or stop using our products and services, and we may incur significant legal and financial exposure.

        Third parties have in the past attempted, and may in the future attempt, to use malicious applications to interfere with our users' internet experience, including hijacking queries to our search engine, altering or replacing Yandex search results, or otherwise disrupting our ability to connect with our users. Such interference often occurs without disclosure to or consent from users, resulting in a negative experience that users may associate with Yandex. Such an attack could also lead to the destruction or theft of information, potentially including confidential or proprietary information relating to Yandex's intellectual property, content and users. For example, if a third party were to hack into our network, they could obtain access to our search code. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose users and customers.

        Our security measures may also be breached due to employee error, malfeasance, system errors or vulnerabilities, or otherwise. Additionally, outside parties may attempt to fraudulently induce employees, users, or customers to disclose sensitive information in order to gain access to our data or our users' or customers' data. Such security breaches expose us to a risk of loss of this information, litigation, remediation costs, increased costs for security measures, loss of revenue, damage to our reputation, and potential liability.

        In addition, we offer applications and services that our users download to their computers or that they rely on to store information and transmit information to others over the internet. These services are subject to attack by viruses, worms and other malicious software programs, which could jeopardize the security of information stored in a user's computer or in our computer systems and networks. These applications may be difficult to remove or disable, may reinstall themselves and may circumvent other applications' efforts to block or remove them. If our efforts to combat these malicious applications are unsuccessful, or if our services have actual or perceived vulnerabilities, our reputation may be harmed, our user traffic could decline, and our communications with certain users could be impaired, which could adversely affect our business, financial condition and results of operations.

Certain technologies could block our ads, which may adversely affect our business, financial condition and results of operations.

        Third parties have in the past, and may in the future, employ technologies to block the display of ads on webpages. In 2015 Apple introduced support for content blocking extensions for its Safari browser running on iOS 9 which allow the use of ad-blocking technology. Ad-blocking technology, if used widely and effectively, would reduce the amount of revenue generated by the ads we serve and

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decrease the confidence of our advertisers and Yandex ad network partners in our advertising technology, which may adversely affect our business, financial condition and results of operations.

If we fail to detect click fraud or other invalid clicks, we may face litigation and may lose the confidence of our advertisers, which may adversely affect our business, financial condition and results of operations.

        We are exposed to the risk of fraudulent and invalid clicks on the ads we serve from a variety of potential sources. Invalid clicks are clicks that we have determined are not intended by the user to access the underlying content, including clicks resulting from click fraud. Click fraud usually occurs when an automated script or computer program is used to imitate a legitimate web browser user clicking on an ad. We monitor our own websites and those of our partners for click fraud and proactively seek to prevent click fraud and filter out fraudulent or other invalid clicks. To the extent that we are unsuccessful in doing so, we credit our advertisers for clicks that are later attributed to click fraud. If we are unable to stop these invalid clicks, these credits to our advertisers may increase. If we find new evidence of past invalid clicks, we may retroactively issue credits to advertisers in respect of such invalid clicks. This could negatively affect our profitability, and these invalid clicks may harm our brand. In addition, affected customers may also file legal actions against us claiming that we have over-charged or failed to refund them. Any such claims or similar claims, regardless of their merits, could be time-consuming and costly for us to defend against and could also adversely affect our brand and our customers' confidence in the integrity of our systems.

As the internet evolves, an increasing amount of online content may be held in closed social networks or stored in proprietary document formats, which may limit the effectiveness of our search technology, which could adversely affect our brand, business, financial condition and results of operations.

        Social networks are becoming increasingly important players in the internet market, and have a significant degree of control over the manner and extent to which information on their websites can be accessed through third-party search engines. For example, in early 2013 we launched our Wonder mobile application in the United States, which enabled personalized search of information available to users through their accounts with various social networks and services, including Facebook, Twitter, Instagram and Foursquare. Facebook subsequently blocked our access to its platform Application Programming Interface and launched a graph search service of its own.

        In addition, a large amount of information on the internet is provided in proprietary document formats such as Microsoft Word and Adobe Acrobat. The providers of the software applications used to create these documents could engineer the document format to prevent or interfere with our ability to access the document contents with our search technology.

        If social networks or software providers take steps to prevent their content or documents in their formats from being searchable, such content would not be included in our search results even if the content was directly relevant to a search request. These parties may also seek to require us to pay them royalties in exchange for giving us the ability to search content on their sites or documents in their format and provide links thereto in our search results. If these parties also compete with us in the search business, they may give their search technology a preferential ability to search their content or documents in their proprietary format. Any of these results could adversely affect our brand, business, financial condition and results of operations.

We may not be able to prevent others from unauthorized use of our intellectual property rights, which may adversely affect our competitive position, our business, financial condition and results of operations.

        We rely on a combination of patents, trademarks, trade secrets and copyrights, as well as nondisclosure agreements, to protect our intellectual property rights. Our patent department is responsible for developing and implementing our group-wide patent protection strategy in selected

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jurisdictions, and to date we have filed more than 250 patent applications, of which more than 10 have resulted in issued patents to date. The protection and enforcement of intellectual property rights in Russia and other markets in which we operate, however, may not be as effective as that in the United States or Western Europe. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant infringement of our intellectual property rights could harm our business, our brand and/or our ability to compete, all of which could adversely affect our competitive position, our business, financial condition and results of operations.

We may be subject to intellectual property infringement claims, which are costly to defend, could result in significant damage awards, and could limit our ability to provide certain content or use certain technologies in the future.

        A number of internet, technology, media and patent-holding companies own or are actively developing patents covering search, indexing, electronic commerce and other internet-related technologies, as well as a variety of online business models and methods. We believe that these parties will continue to take steps to protect these technologies, including, but not limited to, seeking patent protection in certain jurisdictions. As a result, disputes regarding the ownership of technologies and rights associated with online activities are likely to arise in the future. In addition, use of open-source software is often subject to compliance with certain license terms, which we may inadvertently breach.

        With respect to any intellectual property rights claim, we may have to pay damages or compensation and/or stop using technology found to be in violation of a third party's rights. We may have to seek a license for the technology, which may not be available on commercially reasonable terms or at all, and may significantly increase our operating expenses. We may be required to develop an alternative non-infringing technology, which may require significant effort, expense and time to develop. If we cannot license or develop technology for any potentially infringing aspects of our business, we may be forced to limit our service offerings and may be unable to compete effectively. We may also incur substantial expenses in defending against third-party infringement claims regardless of the merit of such claims.

Our ability to offer our services may be adversely affected by laws and regulations or user concerns regarding privacy and the protection of user data, any of which could materially adversely affect our business, financial condition and results of operations.

        Applicable Russian and foreign laws and regulations govern the collection, use, sharing and security of data that we receive from our users and partners. Although we believe that we comply with all current requirements, these laws could in the future be amended, interpreted and applied in a manner that is inconsistent with current practice. For instance, in May 2014 the Court of Justice of the European Union established that an operator of a search engine can be obligated to remove from the list of search results links to web-pages containing inaccurate or outdated information related to an individual. Russian personal data laws have also been amended, granting a similar right to Russian citizens, who from January 2016 have been able to apply for the removal of search results that link to inaccurate or irrelevant information about them. If personal data legislation is amended, interpreted or applied in a manner not consistent with current practice, we could face fines or orders requiring that we change our operating practices, which in turn could have a material adverse effect on our business, financial condition and results of operations. Recently adopted amendments to the personal data law in Russia have required since September 2015 that companies store all personal data of Russian users only in databases located inside Russia. Although our principal data centers are currently located in Russia, this law could limit our flexibility in managing our operations globally.

        Increasing public awareness of these issues could lead to further restrictions on the use of such data, which could in turn affect our search performance and therefore our ability to generate advertising revenue. In addition, it is our policy to protect the privacy of our users and to keep

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confidential the data they provide to us, and as a result we may choose not to exploit certain opportunities to maximize revenues in ways that could jeopardize our users' trust in us in this regard. Compliance with new data protection regulations could also require significant expenditure of time and resources.

        Furthermore, we use cookies and other widespread technologies that assist us in improving the user experience and personalization of our products and services that ultimately benefit both our users and advertisers through behavioral targeting, which makes our advertising more relevant. There is no clarity as to whether our practices are compliant with the requirements of applicable data protection legislation in Russia and abroad, and such laws could be interpreted and applied in a manner that is not consistent with our current data protection practices.

        Additionally, as our business grows in foreign jurisdictions beyond Russia and our services are offered to foreign users, we may encounter increased pressure from foreign state authorities with respect to production of information related to the users in circumvention of the international legal framework regulating the provision of such information. Any non-compliance with such requests may lead to liability and other adverse consequences.

We may be held liable for information or content displayed on, retrieved by or linked to our websites and mobile applications, or distributed by our users, or we may be required to block certain content, or access to our websites can be restricted, which could harm our reputation and business.

        The law and enforcement practice relating to the liability of providers of online services for the activities of their users is currently not settled in Russia and certain other countries in which we operate. Claims may be brought against us for defamation, libel, negligence, copyright, patent or trademark infringement, tort (including personal injury), fraud, other unlawful activity or other theories and claims based on the nature and content of information to which we link or that may be posted online via blogs and message boards, generated by our users or delivered or shared through our services such as email, chat rooms, hypertext links to third-party websites, or video, image and file storage services, including if appropriate licenses and/or rights holder's consents have not been obtained. For example, we have previously been involved in litigation regarding alleged copyright infringement in the United States. We are also regularly required to remove content uploaded by users on grounds of alleged copyright infringement, and from time to time we receive requests from individuals who do not want their names or websites to appear in our search results. Third parties may also seek to assert claims against us alleging unfair competition, data misappropriation, violations of privacy rights or failure to maintain the confidentiality of user data. Our defense of any such actions could be costly and involve significant time and attention of our management and other resources. If any of these complaints results in liability to us, the judgment or settlement could potentially be costly, encourage similar lawsuits, and harm our reputation and possibly our business.

        The governments of the countries in which we operate are increasingly developing legislation aimed at regulation of the internet. For example, in August 2013, new amendments to Russian laws, including to the Russian Civil Code, came into effect aimed at the enhancement of intellectual property rights enforcement on the internet. Certain provisions aimed at the liability of information intermediaries could be construed to establish liability for actions not previously actionable, such as linking to allegedly infringing materials. Also, in October 2014, new amendments to the Russian Civil Code came into effect introducing strict liability for infringement of intellectual property rights if such infringement is committed in connection with business activities. New legislation and regulations, such as these, may impose new requirements on us and our operations and lead to material legal liability, which can be difficult to foresee or limit.

        Additional recent legislation in Russia has introduced a system of information and website blocking measures both to prevent and stop copyright and related rights infringements (other than infringements

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of copyright in photographs) and to prevent dissemination of illegal information, such as child pornography, content encouraging suicides and drug use, information on minors hurt by illegal actions and extremist information. The regulations generally require notification to be sent by governmental authorities to the administrator of the website or hosting provider, requesting that they take down the allegedly infringing or illegal information prior to blocking access to the website. However, in some cases, such as dissemination of extremist information, access to such information can be blocked without notification or prior judicial scrutiny. The categories of illegal information to which access can be restricted may be interpreted broadly or be expanded. For example, in July 2014 Russian authorities ordered that access to several websites be blocked on the basis of the violation of personal data regulations. An amendment to this legislation, which came into force on May 1, 2015, permits the permanent blocking of websites for violation of copyright and related rights. There is no clarity as to how this measure will be applied in practice. Based on these considerations and the uncertainties in the application of these laws, we may be subject to unpredictable blocking measures, injunctions or court decisions that may require us to block or remove content and may adversely affect our services and operations. In addition, to ensure compliance with such laws we may be required to commit greater resources, or to limit functionality of our services, which may adversely affect the appeal of our services to our customers.

        These risks also apply in other countries in which we operate. For example, in February 2014, new Turkish legislation expanded the liability of and requirements for internet service providers. Another law adopted in October 2014 introduced the regulation of electronic commerce and affects online sales, commercial messages and the protection of personal data. The Turkish Parliament, Constitutional Court and Supreme Court actively introduce, interpret and implement new rules to regulate the liability of, and may create new obligations for, internet service providers. In addition, in 2015 access to social media websites was temporarily restricted in Turkey following the publication of images of an attack on a Turkish official. Adoption of new rules, as well as interpretation and implementation of existing legislation regulating activities of internet service providers, may affect our business in Turkey and other countries in which we operate.

We rely on third-party providers for our principal internet connections and equipment critical to our internet properties and services, and any errors, failures or disruption in the products and services provided by these third parties may materially adversely affect our brand, business, financial condition and results of operations.

        Any disruption in the network access provided by third parties or any failure by them to handle current or higher future volumes of use may significantly harm our business. We exercise little control over these third parties, which increases our vulnerability to problems with the services they provide. We have experienced and expect to continue to experience interruptions and delays in service from time to time. Furthermore, we depend on hardware and software suppliers for prompt delivery, installation and service of servers and other equipment to deliver our services. Any errors, failures, interruptions or delays experienced in connection with these third-party products and services may negatively impact our relationship with users and materially adversely affect our brand, business, financial condition and results of operations.

We may have difficulty scaling and adapting our existing technology architecture to accommodate increased traffic and technology advances or new requirements of our users and advertisers, which could adversely affect our business, financial condition and results of operations.

        With some of the most highly visited websites in Russia, we deliver a growing number of services and page views to an increasing number of users. In addition, the services we offer have expanded and changed significantly and are expected to continue to do so in the future to accommodate bandwidth-intensive technologies and means of content delivery, such as interactive multimedia and video. Our future success will depend on our ability to adapt to rapidly changing technologies, to adjust our

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services to evolving industry standards and to maintain the performance and reliability of our services. Rapid increases in the levels or types of use of our online services could result in delays or interruptions in our services.

        As we expand our services, we will need to continue to invest in new technology infrastructure, including data centers. We may have difficulty in expanding our infrastructure to meet any rising demand for our services, including difficulties in obtaining suitable facilities or access to sufficient electricity supplies. A failure to expand our infrastructure could materially and adversely affect our ability to maintain and increase our revenues and profitability and could adversely affect our business, financial condition and results of operations.

A systems failure or human error could prevent us from providing search results or ads, which could lead to a loss of users and advertisers and damage our reputation and materially adversely affect our business, financial condition and results of operations.

        Although we maintain robust network security measures, our systems are potentially vulnerable to damage or interruption from terrorist attacks, denial-of-service attacks, computer viruses or other cyber-attacks or attempts to harm our system, power losses, telecommunications failures, floods, fires, extreme weather conditions, earthquakes and similar events. Our data centers, which we maintain ourselves, are also potentially subject to break-ins, sabotage and intentional acts of vandalism, and to potential disruptions. The occurrence of a natural disaster or other unanticipated problems at our data centers could result in lengthy interruptions in our service, which could reduce our revenues and profits, and our brand could be damaged if people believe our services are unreliable.

        From time to time, we have experienced power outages that have interrupted access to our services and impacted the functioning of our internal systems. Although we maintain back-up generators, these may not operate properly through a major sustained power outage or their fuel supply could be inadequate. Any unscheduled interruption in our services places a burden on our entire organization and would result in an immediate loss of revenue. If we experience frequent or persistent system failures on our websites, our reputation and brand could be permanently harmed. The steps we have taken to increase the reliability and redundancy of our systems are expensive, reduce our operating margin and may be insufficient to reduce the frequency or duration of unscheduled downtime.

        In addition to physical damage and power outages, our systems are also vulnerable to human error. For example, we experienced two brief periods of downtime in 2012 and 2013 due to coding errors, which had nominal impacts on our search share. There were no significant downtime periods in 2014 and 2015. Although we test updates before implementation, errors made by our employees in maintaining or expanding our systems may damage our brand and materially adversely affect our business, financial condition and results of operations.

Our business depends on the continued development and maintenance of the internet infrastructure in the countries in which we operate.

        Our future success will depend on the continued development and maintenance of the internet infrastructure globally and particularly in the countries in which we operate. This includes maintenance of a reliable network backbone with the necessary speed, data capacity and security for providing reliable internet services. The internet infrastructure may be unable to support the demands placed on it by growing numbers of users and time spent online or increased bandwidth requirements. Any outages or delays resulting from inadequate internet infrastructure could reduce the level of internet usage as well as our ability to provide our services to users, advertisers and network partners, which could materially adversely affect our business, financial condition and results of operations.

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We may seek to acquire complementary businesses, teams and technologies in the future, and may fail to identify suitable targets, acquire them on acceptable terms or successfully integrate them, which may limit our ability to implement our growth strategy. Acquisition of new businesses may also lead to increased legal risks and other negative consequences which could have an adverse effect on our business, financial condition and results of operations.

        From time to time we acquire other businesses, technologies and teams. For example, in 2013 we completed the acquisition of KinoPoisk LLC, a website dedicated to movies, television programs and celebrities; in 2014 we completed the acquisitions of KitLocate Ltd., a developer of an energy efficient geolocation technology for mobile devices, Auto.ru, a Russian online auto classifieds site, the ADFOX advertising technology platform, and several others; and in 2015 we purchased the RosTaxi fleet management application and computerization of taxi operations, and certain intellectual property assets from Agnitum, a developer of internet security products. In February 2016, we signed a definitive agreement for the acquisition of the office complex in which our Russian headquarters is located in central Moscow.

        We continue to evaluate selected potential acquisitions and, from time to time, may engage in discussions regarding potential acquisitions. The acquisition and integration of new businesses or technologies pose significant risks to our existing operations, including:

        The integration of new businesses presents a number of challenges, including differing cultures or management styles, poor financial records or internal controls on the part of the acquired companies, and an inability to establish control over cash flows. Furthermore, even if we are successful in integrating new businesses, expected cost and operating efficiencies may not materialize, the financial benefits from the acquisition may be less than anticipated, and we could be required to record impairment changes in respect of under-performing assets.

        Moreover, our growth may suffer if we fail to identify suitable acquisition targets or are outbid by competing bidders. As a NASDAQ-listed company, we are subject to securities laws and regulations that, in certain circumstances, require that we file with the SEC audited historical financial statements for businesses we acquire that exceed certain materiality thresholds. Given financial reporting practices in Russia and other countries in which we operate, such financial statements and documented systems of internal controls over financial reporting are often not readily available or not capable of being audited to the standards required by U.S. securities regulations. As a result, we may be prevented from or delayed in pursuing acquisition opportunities that our competitors and other financial and strategic investors are able to pursue, which may limit our ability to implement our growth strategy.

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If we are unable to license, acquire or create compelling content at reasonable costs, the number of users of our services may not grow as anticipated or may decline, which would adversely affect our business, financial condition and results of operations.

        Our future success depends in part upon our ability to offer compelling content. We license from third parties much of the content of our services, such as music, news items, weather reports and TV program schedules. If we are unable to maintain and build relationships with third-party content providers this would likely result in a loss of user traffic. In addition, we may be required to make substantial payments to third parties from whom we license or acquire such content. An increase in the prices charged to us by third-party content providers would adversely affect our business, financial condition and results of operations.

        Further, many of our content licenses with third parties are non-exclusive. Accordingly, other websites and other media such as radio or television may be able to offer similar or identical content. This increases the importance of our ability to aggregate compelling content in order to differentiate Yandex from other businesses. If other companies make available competitive content, the number of users of our services may not grow as anticipated, or may decline.

Our Yandex.Money joint venture may be used for fraudulent, illegal or improper purposes, which could materially adversely affect our brand, reputation, business, financial condition and results of operations.

        The electronic payments system of our Yandex.Money joint venture with Sberbank is susceptible to fraud and to potentially illegal or improper uses, and we have on occasion identified or been informed of such uses in the past. These may include:

        Our ability to control the day-to-day operations of Yandex.Money following completion of the joint venture transaction in July 2013 is more limited than was the case while we were the sole owner of this business. If Yandex.Money is unable to prevent, detect or otherwise adequately address fraud or other improper uses of its services, users may lose confidence in the integrity and security of its services, which may result in a reduction in the number of users and transactions. Any negative publicity associated with the Yandex name in connection with such activities, including criminal proceedings against a user who conducts illegal activities using its services, could result in damage to our brand or reputation. If we are unable to manage these risks, our brand, reputation, business, financial condition and results of operations could be materially adversely affected.

Failure to maintain effective customer service may result in customer complaints and negative publicity and may adversely affect our business, financial condition and results of operations.

        Customer complaints or negative publicity about our services or those offered by us (including services offered by our business units) or our Yandex.Money joint venture with Sberbank, or breaches

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of customers' privacy or of our security measures, could diminish consumer confidence in and use of our services. Measures we implement to combat risks of fraud and breaches of privacy and security may be viewed as onerous by our customers or those of our joint venture and damage relations with them. Alternately, should breaches of customers' privacy or of security measures occur, we could be subject to investigations and claims from governmental bodies, as well as from our customers. These measures heighten the need for prompt and accurate customer service to resolve irregularities and disputes. Effective customer service requires significant personnel expense, and such expense, if not managed properly, may impact our profitability or that of our Yandex.Money joint venture. Any inability by us or our Yandex.Money joint venture to manage or train our or their customer service representatives properly could compromise our or their ability to handle customer complaints effectively. If we or Yandex.Money fail to maintain effective customer service, our reputation may suffer and we may lose our customers' confidence, which may adversely affect our business, financial condition and results of operations.

The inherent limitations of the available data regarding internet usage and online advertising may make it difficult to assess our markets and our market position.

        We rely on and refer to information and statistics from various third-party sources, as well as our own internal estimates, regarding internet usage and penetration and the online advertising markets in the countries in which we operate. The information and statistics used in our industry are subject to inherent limitations reflecting the differing metrics and measurement methods utilized and applied by different sources; for example, data derived from computer usage contrasted to that derived from user surveys. In addition, while we believe that the available data and research on the Russian market is of comparable quality to that available in most developed countries, the data for Ukraine, Kazakhstan and Belarus are generally less consistent and reliable due to more limited third-party measurements in those countries.

We may be subject to claims from our current or former employees as well as contractors for copyright, trade secret and patent-related matters, which are costly to defend and if lost by us could adversely affect our business, financial condition and results of operation.

        The software, databases, algorithms, images, patentable intellectual property, trade secrets and know-how that we use for the operation of our services were generally developed, invented or created by our former or current employees or contractors during the course of their employment with us within the scope of their job functions or under the relevant contractor's agreement, as the case may be. As a matter of Russian law, we are deemed to have acquired copyright and related rights as well as rights to file patent applications with respect to such products, and have the intellectual property rights required for their further use and disposal subject to compliance with certain requirements set out in the Civil Code of Russia. We believe that we have appropriately followed such requirements, but they are defined in a broad and ambiguous manner and their precise application has never been definitively determined by the Russian courts. Therefore, former or current employees or contractors could either challenge the transfer of intellectual property rights over the products developed by them or with their contribution or claim the right to additional compensation for their works for hire and/or patentable results, in addition to their employment compensation. We may not prevail in any such action and any successful claim could adversely affect our business, financial condition and results of operation. Although the exact amount of compensation is not currently regulated by Russian law, the Russian government has previously proposed establishing a de minimis amount of required compensation for works and patentable results created by employees, which, if adopted, may affect the amount and structure of payments to our employees.

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Risks Related to Doing Business and Investing in Russia and Other Countries in which We Operate

Emerging markets, such as Russia, are generally subject to greater financial, economic, legal and political risks than more developed markets. Such risks may have a material adverse effect on our business, financial condition and results of operations.

        Emerging markets such as Russia are subject to greater risks than more developed markets, including financial, economic, legal and political risks. Such risks or an increase in the perceived risks associated with investing in emerging economies could dampen foreign investment and adversely affect the economies of the countries in which we operate. For example, the current geopolitical situations in Ukraine and Syria, as well as recent decreases in oil prices, may continue to have deleterious macroeconomic and other effects on the regions in which we operate, including increased volatility in currency values and a weaker overall business environment. In addition, such circumstances may continue to harm or encourage volatility in our share price and in equity markets in general. These emerging markets and economies are also subject to rapid change. For these reasons, our business, financial condition and results of operations may be materially adversely affected by any crises in Russia or other emerging markets in which we operate. See also "Risks Related to the Russian Economy."

Adoption of embargo, economic or other sanctions, as well as similar measures against the countries in which we operate may have a material adverse effect on our business, financial condition and results of operations.

        In 2015 the Russian President introduced certain restrictions on the import of Turkish goods into Russia, as well as on the operations of Turkish companies in Russia and flight connections between the two countries. On January 1, 2016 restrictions on the import of food products from Ukraine into Russia came into force, and the free trade regime between Ukraine and Russia was suspended by Russian authorities. Although these actions by the Russian authorities do not directly limit our operations in Turkey or Ukraine, if these countries adopted reciprocal measures that affect Russia or Russian companies, such measures could materially adversely affect our operations in Turkey or Ukraine.

Inflation may increase our costs and exert downward pressure on our operating margins.

        The Russian economy has generally been characterized by high rates of inflation in recent years. According to the Russian Federal State Statistics Service, Rosstat, the annual inflation rate in Russia was 6.5% in 2013, 11.4% in 2014 and 12.9% in 2015, as measured by the consumer price index. Because substantially all of our operations are in Russia, our costs are sensitive to increases in prices in Russia. As a result, high rates of inflation increase our costs, and these increases in cost could negatively impact our operating margin.

The legal system in Russia and other countries in which we operate can create an uncertain environment for investment and business activity that could have a material adverse effect on the value of our Class A shares, our business, financial condition and results of operations.

        The legal framework supporting a market economy remains new and in flux in Russia and the other countries in which we operate and, as a result, the relevant legal systems can be characterized by:

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        Any of these factors may result in our being subject to unpredictable fines or requirements, affect our ability to enforce our rights under our contracts or to defend ourselves against claims by others, or result in our being subject to unpredictable requirements, and could have a material adverse effect on our Class A shares and our business, financial condition and results of operations. The fact that we are a high-profile company may heighten this risk. See "—Businesses in Russia have on occasion been subject to actions by public authorities that some have characterized as unpredictable or politically motivated" and "—Risks in other countries."

The legal framework governing internet services and e-commerce in Russia and the other countries in which we operate is evolving, and we may be required to obtain additional licenses, permits or registrations, or to take additional actions in order to conduct our business, which may be costly or may limit our flexibility to run our business.

        Although we believe that we currently have all material licenses and permits currently required to conduct our business, court interpretations and the applicability of Russian commercial legislation and regulations in relation to our business can be ambiguous or contradictory and it is possible that the authorities may determine that we are required to have additional licenses, permits or registrations. For example, we could fall within the following regulations that require receipt of licenses/permits or compliance with certain mandatory procedures:

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        In addition to requiring receipt of licenses/permits or compliance with certain mandatory procedures, development of the legal framework in Russia can require us to modify the services we provide or take additional actions in order to comply with new legislation regulating the provision of internet services, for example:

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        If we fail to obtain and maintain required licenses, permits or registrations, or fail to comply with other applicable legal requirements, we may face fines, penalties or sanctions. These may include a requirement that we permanently or temporarily cease certain of our business activities, administrative penalties or criminal prosecution of our officers. In addition, we might be unable to immediately comply with new regulations upon their implementation.

We may be subject to laws that impose restrictions on the processing of certain types of personal and other data, which may affect our ability to flexibly manage our business or make it more costly to do so, or subject us to fines or other penalties.

        Collection and handling of personal data by any entity or person in Russia is subject to certain requirements and restrictions, including obtaining written consent from the relevant individual and using technical and encryption means for the protection of personal data. In addition, subject to several exemptions, a notification must be made to the appropriate Russian governmental body, Roscomnadzor, to process personal data. We do not collect or perform any operations on our users' personal data, except when such collection or processing is in accordance with our terms of services and privacy policies which are available on our websites. Due to the absence of established court practice and official guidelines on the application of exemptions, however, we cannot assure you that the regulator may not take a view that we nevertheless have to file a notification or comply with other requirements. If we are ultimately required to file such a notification or otherwise are determined to be subject to the rules regarding the collection and handling of personal data, we may be required to use special technical facilities and equipment and to adopt extensive internal compliance rules for the protection of personal data, which may adversely affect our ability to flexibly manage our business or make it more costly to do so.

        Amendments to the Russian personal data law adopted in 2014 require that companies store all personal data of Russian users only in databases located inside Russia from September 1, 2015. Non-compliance with this requirement may lead to legal liability and potentially to restriction of the availability of the service in Russia. Since this legislation is drafted in very general terms, it is uncertain whether it applies to our operations or, if it does apply, to what extent. Compliance with the requirements provided in this legislation may be practically difficult, require significant efforts and resources, could lead to legal liability in other jurisdictions and limit functionality of our services. Compliance with the requirements contained in the new legislation may also limit our ability to compete with other companies located in other jurisdictions that do not require mandatory local storage of personal data relating to their users.

        Due to the nature of services we offer and the fact that we have a presence in a number of countries, we may also be subject to personal data laws of other jurisdictions, especially laws regulating the cross-border transfer of personal data, which may require significant compliance efforts and could result in liability for violations in other jurisdictions.

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        Further, current law imposes restrictions on the distribution of satellite images of certain areas in Russia and the other countries in which we operate and imposes requirements with respect to the information provided by the traffic monitoring service we offer. If we were found to be in violation of any such restrictions, we may be forced to suspend such services or may potentially be subject to fines or other penalties.

We may be subject to data retention regulations that require us to collect, store and produce to the state authorities certain types of data related to the activity of our users, which may require us to acquire additional storage, make amendments to our services and products, or harm our reputation with users.

        In 2014, the Russian government adopted legislation to regulate "organizers of information distribution". The legislation is drafted in general terms and can potentially apply to any person developing software that may receive, transfer, deliver or process electronic messages of internet users. Organizers of information distribution must notify the relevant Russian authority about the commencement of their operations, and must retain a broad range of data relating to and generated by their users for a period of six months and provide such data to security and investigation authorities at their request. If an organizer of information distribution fails to comply with the above requirements, the Russian authorities can prescribe the blocking of access to its services.

        Although the scope of this legislation is uncertain, our main subsidiary operating in Russia has notified the relevant Russian authority that it acts as an organizer of information distribution with respect to some of the services it provides. Compliance with the legislative requirements may require significant expenditures by us such as expenditures on additional data centers, servers and other infrastructure or software development. Data retention may also harm our reputation with users and make our services less competitive in comparison with the services provided by companies located in other jurisdictions that do not require the mandatory retention of data relating to their users. Failure to comply with the requirements of the new legislation may lead to our services being unavailable for our users in Russia.

We may be subject to existing or new advertising legislation that could restrict the types and relevance of the ads we serve, which would result in a loss of advertisers and therefore a reduction in our revenues.

        Russian law prohibits the sale and advertising of certain products, such as illegal drugs. In addition, advertising for certain regulated products and services may only be conducted by, or on behalf of, advertisers who possess the licenses, approvals and certificates required to market and sell such products and services. Ads for certain products and services, such as financial services, as well as ads aimed at minors and some others, must comply with specific rules and must in certain cases contain required disclaimers. Furthermore, a July 2012 amendment to Russian advertising legislation outlawed the advertising of alcohol on the internet as well as in periodicals. Similar regulations were adopted in November 2013 with respect to the advertising of cigarettes, tobacco products and smoking accessories. In January 2014, new regulations came into force which limited or in certain cases prohibited the advertising of medical services; these restrictions were loosened to some degree in June 2014. New regulations of foreign exchange brokers which came into force in 2015 could limit the advertising of their services.

        Further amendments to legislation regulating advertising may impact our ability to provide some of our services or limit the type of advertising we may offer. The application of these laws to parties, such as Yandex, that merely serve or distribute ads and do not market or sell the product or service, however, can be unclear. Pursuant to our terms of service, we require that our advertisers have all required licenses or authorizations. If our advertisers do not comply with these requirements, and these laws were to be interpreted to apply to us, or if our ad-serving system failed to include necessary disclaimers, we may be exposed to administrative fines or other sanctions, and may have to limit the types of advertisers we serve.

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        The regulatory framework in Russia governing the use of behavioral targeting in online advertising is unclear. If new legislation were to be adopted, or current legislation were to be interpreted, to restrict the use of behavioral targeting in online advertising, our ability to enhance the targeting of our advertising could be significantly limited, which could result in a loss of advertisers or a reduction in the relevance of the ads we serve, which would reduce the number of clicks on the ads and therefore our revenues.

Our need to comply with applicable Russian laws and regulations could hamper our ability to offer services that compete effectively with those of our foreign competitors and may adversely affect our business, financial condition and results of operations.

        Many of our global competitors, such as Google, Microsoft and Yahoo!, have their principal operations outside of Russia, putting them generally outside of the jurisdiction of Russian courts and government agencies, even though some of them have offices in Russia. Our systems and operations are located principally in Russia. Russian laws and regulations that are applicable to us, but not to our foreign competitors, may impede our ability to develop and offer services that compete effectively on a global scale as well as in Russia with those offered by our foreign-based competitors and generally available worldwide over the internet. Any inability on our part to offer services that are competitive with those offered by our foreign competitors may adversely affect our business, financial condition and results of operations.

Russian authorities could determine that we hold a dominant position in one or more of our markets, and could impose limitations on our operational flexibility that may adversely affect our business, financial condition and results of operations.

        Russian anti-monopoly legislation imposes restrictions on companies that occupy a dominant position in a given market. We believe that the authorities have not to date focused on internet advertising in Russia to any significant extent, although we are aware of public statements by government officials suggesting that the authorities may analyze the business of online social networking. In February 2015, we made a formal request to the Russian Federal Antimonopoly Service (FAS) to open an investigation into whether Google is using its dominant position to gain unfair advantages in the promotion of its search and other services on the Android operating system. This request resulted in a recognition by FAS that Google had abused its dominant position in Russia. Google appealed this decision to the Arbitrazh Court of Moscow in December 2015 and the appeal was dismissed in March 2016. The possibility of a further appeal remains. Were the Russian authorities to investigate the broader internet or online advertising industries, as a result of the Android investigation or otherwise, it is possible that they may conclude that, given our market share, we hold a dominant position in one or more of the markets in which we operate. Additionally, in 2015 we received information requests from FAS related to certain of our services. If FAS deems that we hold a dominant position in one or more of the markets in which we operate this could result in limitations on our future acquisitions and a requirement that we pre-approve with the authorities any changes to our standard agreements with advertisers and Yandex ad network partners, as well as any specially negotiated agreements with business partners. In addition, if we were to decline to conclude a contract with a third party or terminate an existing agreement without sufficient substantiation this could, in certain circumstances, be regarded as abuse of a dominant market position.

        Any abuse of a dominant market position could lead to administrative penalties and the imposition of fines of up to 15% of our prior year annual revenues in the relevant market. These limitations may reduce our operational and commercial flexibility and responsiveness, which may adversely affect our business, financial condition and results of operations.

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Businesses in Russia have on occasion been subject to actions by public authorities that some have characterized as unpredictable or politically motivated.

        Many commercial laws and regulations in Russia are relatively new and have been subject to limited interpretation. As a result, their application can be unpredictable. In addition, government authorities have a tendency to follow a very formal approach in certain cases, are entrusted with a high degree of discretion and have at times exercised their discretion in ways that may be perceived as selective or unpredictable, and sometimes in a manner that is seen as being influenced by political or commercial considerations. Such actions have included the termination or invalidation of contracts, withdrawal of licenses, sudden and unexpected tax audits, criminal prosecutions, administrative investigations and civil actions. Federal and local government entities have also used common defects in documentation as pretexts for court claims and other demands to invalidate and/or to void transactions, apparently for political purposes. We cannot assure you that regulators, judicial authorities or third parties will not challenge our compliance with applicable laws, decrees and regulations.

        The Russian government has taken various actions in recent years against business people and companies operating in Russia that have been perceived as having been politically motivated, including actions for technical violations of law or violations of laws that have been applied retroactively, such as violations of tax laws, or interpretations of widely used practices in specific cases as impermissible. In 2014 a high-ranking Russian official made public statements about Yandex that were perceived by some to be negative, following which the price of our Class A shares dropped significantly.

        High-profile businesses in Russia, such as ours, can be particularly vulnerable to politically motivated actions. Some Russian television broadcasters, for example, have experienced what some would characterize as politically motivated actions, including efforts to facilitate change of control. Although we believe that our commitment to content neutrality principles lessens the risk of politically motivated actions against us, we cannot guarantee that we will not be affected by politically motivated actions that could materially adversely affect our operations. Moreover, although our Yandex.News service aggregates content by automatic algorithm, without regard to viewpoint, other parties may perceive our Yandex.News service as reflecting a political viewpoint or agenda, which could subject us to politically motivated actions. See also "—The legal framework governing internet services and e-commerce in Russia and the other countries in which we operate is in the process of development, and we may be required to have additional licenses, permits or registrations, or to take additional actions in order to conduct our business, which may be costly or may limit our flexibility to run our business."

        The Russian parliament may adopt and government officials may apply unpredictable, contradictory or ambiguous laws or regulations in ways that have a material adverse effect on our business, financial condition and results of operations. Such actions have on occasion resulted in significant fluctuations in the market prices of the securities of businesses operating in Russia, a weakening of investor confidence in Russia and doubts about the progress of market and political reforms in Russia. Businesses operating in Russia can also be significantly affected by the rapid and unpredictable adoption of legislation, which can restrict or prohibit business practices that were previously permitted. For example, in 2013 the stock prices of a Russian bank focused on distance banking services and a company offering instant payment services dropped sharply after the news about the possible introduction of new laws that could impact their operations. Following the adoption in 2014 of amendments to the Russian Mass Media Law restricting foreign ownership and control of mass media, the stock price of a television broadcaster operating in Russia and listed on a foreign stock exchange dropped significantly.

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If the Russian government were to impose limitations on foreign ownership of internet businesses in Russia, it could materially adversely affect our group and the value of our Class A shares.

        On January 1, 2016, an amendment to the Russian law "On Mass Media" became effective that reduced the permitted level of foreign ownership in companies that hold Russian mass media registrations. The law limits the ownership or control, direct or indirect, of Russian mass media entities by non-Russian entities and individuals to no more than 20%. Yandex's principal businesses in Russia are not currently required to register as mass media, and therefore this new law is not applicable to our business. Were a new law with a similar regulation to be adopted that imposed a limitation on foreign ownership of internet businesses such as ours, or were the mass media law to be amended to require that our businesses register as mass media or implement a separate registration for online services, this could require a significant change in our operating or ownership structure, which could materially adversely affect our operations and/or the value of our Class A shares.

        In order to comply with the new limitations on foreign ownership of mass media in Russia, our Yandex.Traffic service uses the services of an information agency that is not owned by Yandex when providing information services to its customers. However, there is no guarantee that the operation of our Yandex.Traffic service will be deemed compliant with the limitations on foreign ownership of mass media or that foreign ownership or sponsorship restrictions applicable to mass media will not adversely affect our Yandex.Traffic service.

        In February, 2016 a draft law was introduced that aims to regulate the provision of online news aggregation services. The draft law proposes to limit to no more than 20% the ownership or control, direct or indirect, by non-Russian entities and individuals of websites that are used to process and disseminate news information and that are accessed by more than one million users per day. If the current proposal is implemented this could significantly affect our Yandex.News service and other services that could be used to process and disseminate news information. In particular, if the draft law is adopted we may have to spend additional resources in order to ensure compliance with new regulations, change the operating principle of or cease to provide our Yandex.News service.

Existing restrictions on foreign ownership may prevent a takeover of our company by a non-Russian party.

        The Russian Federal Law "On the Procedure for Foreign Investments in Companies which are Strategically Important for the State Defense and National Security" (the "Strategic Companies Law") restricts foreign ownership of companies involved in certain strategically important activities in Russia. The relevant activities include activities connected with the use of encryption technologies that are subject to licensing. The internet and online advertising are not currently industries specifically covered by the Strategic Companies Law, but there have previously been draft amendments under consideration by the Russian State Duma, which, if adopted, would include certain internet companies that have large audiences within the scope of this law.

        We believe that our Yandex.Money joint venture is covered by the Strategic Companies Law due to the fact that PS Yandex.Money LLC currently holds encryption licenses which fall within the scope of the Strategic Companies Law. Since the completion of our joint venture in respect of the Yandex.Money business in July 2013 following the sale by Yandex N.V. to Sberbank of 75% (less one ruble) of the total participation interest in PS Yandex.Money LLC , we believe that the applicable restrictions in respect of private non-Russian persons no longer apply to Yandex N.V., but that the requirement to obtain prior approval from the Russian Government Commission chaired by the Russian Prime Minister continues to be applicable to non-Russian state or international organizations or entities controlled by a non-Russian state or international organization that would seek to acquire shares of Yandex N.V. or enter into an agreement that would establish direct or indirect control over Yandex N.V. and, therefore, trigger application of the Strategic Companies Law. There is also a risk that some of the rights granted to Yandex N.V. under the joint venture agreement with Sberbank could

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be interpreted by Russian authorities as establishing control by Yandex N.V. over PS Yandex.Money LLC, which would require the Russian Governmental Commission's preliminary consent for a broader number of transactions, including by private non-Russian persons.

        These restrictions on ownership of our shares are in addition to the restrictions on ownership of our shares provided for in our articles of association. See "—Risks Related to Ownership of our Class A Shares—Our Board of Directors and Sberbank, our priority shareholder, have the right to approve accumulations of stakes in our company or the sale of our principal Russian operating subsidiary, which may prevent or delay change-of-control transactions," "—Risks Related to ownership of our Class A Shares—Anti-takeover provisions in our articles of association and the shareholders agreement among our principal shareholders may prevent or delay change-of-control transactions."

        Moreover, because Yandex N.V. holds 25% (plus one ruble) in PS Yandex.Money LLC, there is a risk that a change of control in respect of Yandex N.V. would require preliminary consent of the Central Bank of Russia, as Yandex N.V. could be considered to indirectly hold more than 10% of the voting power of a non-banking credit organization.

Businesses in Russia can be subject to efforts by financial groups seeking to obtain control through the exercise of economic or political influence or government connections.

        Well-funded, well-connected financial groups and so-called "oligarchs" have, from time to time, sought to obtain operational control and/or controlling or minority interests in attractive businesses in Russia by means that have been perceived as relying on economic or political influence or government connections. We may be subject to such efforts in the future and, depending on the political influence of the parties involved, our ability to thwart such efforts may be limited.

The Russian banking and financial systems remains less developed than those in some more developed markets, and a banking crisis could place liquidity constraints on our business and materially adversely affect our business, financial condition and results of operations.

        Russia's banking and other financial systems are less well-developed and regulated than those of some more developed markets, and Russian legislation relating to banks and bank accounts is subject to varying interpretations and inconsistent application. Russian banks generally do not meet international banking standards, and the transparency of the Russian banking sector lags behind international norms. In addition, the United States and European Union have imposed "sectoral" and related sanctions on named Russian banks in connection with developments in Ukraine. See "—The current geopolitical conflict in Ukraine and related international economic sanctions may continue to adversely affect the Russian economy and the value of investments in Russia, and could harm our business, financial condition and results of operations."

        As a result, the banking sector remains subject to periodic instability. In 2013 the Central Bank of Russia conducted a review of activities and operations of Russian banks, which in certain cases led to withdrawal of banking licenses. Another banking crisis, or the bankruptcy or insolvency of banks through which we receive or with which we hold funds, may result in the loss of our deposits or adversely affect our ability to complete banking transactions in Russia, which could have a material adverse effect on our business, financial condition and results of operations.

Some of our counterparties provide limited transparency in their operations, which could subject us to greater scrutiny and potential claims from government authorities.

        We do business with a number of companies, especially small companies that do not always operate in a fully transparent manner and that may engage in unpredictable or otherwise questionable practices with respect to tax obligations or compliance with other legal requirements. We have on occasion been approached by government authorities regarding potential tax claims or other compliance

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matters in connection with such transactions. As a larger and more transparent company with greater resources than such counterparties, governmental authorities may seek to collect taxes and/or penalties from us in relation to such transactions on the basis that we had knowledge of or aided such practices even when we did not.

Changes in the tax systems of Russia and other countries in which we operate, as well as unpredictable or unforeseen application of existing rules may materially adversely affect our business, financial condition and results of operations.

        Russian tax, currency, and customs laws and regulations are subject to varying interpretations and changes, which may be frequently revised and reviewed by the authorities. As a result, our interpretation of such tax legislation may be challenged by the relevant authorities. For example, recent major legislative developments in the Russian tax regime, such as the implementation of the new transfer pricing rules, which came into effect in 2012, and anti-offshore and controlled foreign corporation (CFC) rules, which came into effect in 2015, to a large extent resemble the OECD approach but may be implemented in a way which is not in line with international practice or our interpretation. Moreover, under the current conditions of weak economic growth and reduced tax revenue, the authorities are taking a more assertive position in their interpretation of the tax legislation and, as a result, it is possible that transactions and activities that have not been challenged in the past may now be questioned by the authorities. High-profile companies such as ours can be particularly vulnerable to such assertive positions of the authorities.

        Although we believe that our interpretation of relevant legislation is appropriate and is in accordance with existing court practice, if the authorities were successful in enforcing differing interpretations, our tax liability may become greater than the estimated amount that we have expensed to date and paid or accrued on our balance sheet.

        Generally, Russian taxpayers are subject to inspection of their activities for a period of three calendar years immediately preceding the year in which an audit is carried out, with tax audits routinely undertaken at least every two years. A tax audit of our principal Russian subsidiary covering 2013 and 2014 commenced in September 2015 and is expected to be completed in 2016.

Taxes payable on dividends from our Russian operating subsidiaries to our parent company might not benefit from relief under the Netherlands-Russia tax treaty.

        In 2014, our principal Russian operating subsidiary distributed limited dividends to our parent company (Yandex N.V.) and applied withholding tax at a 5% rate in reliance on the provisions of the Netherlands-Russia tax treaty.

        Yandex N.V. is incorporated in the Netherlands and our principal operating subsidiaries are incorporated in Russia. Our management seeks to ensure that we conduct our affairs in such a manner that our parent company is not regarded as tax resident in any jurisdiction other than the Netherlands and, in particular, is not deemed to be a tax resident of, or to have a permanent establishment in, Russia. Thus, dividends paid from our Russian operating subsidiaries to our parent company should generally be subject to Russian withholding tax at a 5% rate. If our parent company were not treated as a Dutch resident for tax purposes or if it were deemed to have a permanent establishment in Russia, or if the Russian tax authorities were to determine that other conditions for the application of the 5% rate are not met, dividends paid from our Russian operating subsidiaries to our parent company would be subject to Russian withholding tax at the rate of 15%.

        Russian tax rules are characterized by significant ambiguities and limited interpretive guidance and are subject to change, and we can provide no assurance that dividend withholding tax relief may not be challenged by the Russian tax authorities based on the grounds mentioned above. Furthermore, Russian tax rules regarding residency and beneficial ownership which were recently introduced may change or

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their interpretation may evolve, thus triggering changes in taxation of dividends from our Russian subsidiaries to our parent company in the future.

        The recently adopted anti-offshore and CFC rules that came into effect in 2015 are generally ambiguous and lack interpretive guidance. Based on the current state of the law and available interpretations, we believe that Yandex N.V. and our material subsidiaries should not be treated as CFCs for Russian tax purposes. However, there are risks that any of these rules may be interpreted or applied in a manner that may have an adverse effect on our results of operations.

We may be required to record a significant deferred tax liability if we are unable to reinvest our earnings in Russia.

        Our principal Russian operating subsidiary has significant accumulated earnings that have not been distributed to the Dutch parent company. Our current policy is to retain substantially all our earnings at the level of our principal subsidiary for investment in Russia.

        We did not provide for dividend withholding taxes on the unremitted earnings of our non-Dutch subsidiaries in 2013 or earlier years because we considered them to be permanently reinvested outside of the Netherlands. In the first quarter of 2014, we began to accrue for a 5% dividend withholding tax on the portion of the current year profit of our principal Russian operating subsidiary that we considered not to be permanently reinvested in Russia. As of December 31, 2015, we had an accrual of RUB 856 million ($11.7 million) for dividend withholding tax. If circumstances change and we are unable to reinvest in that subsidiary's current operations or acquire suitable businesses in Russia, U.S. GAAP would require us to record a deferred tax liability representing the dividend withholding taxes that we would be required to pay if this subsidiary were to pay these unremitted accumulated earnings to our Dutch parent company as a dividend, even if such dividends were not actually declared and paid. As of December 31, 2015, the cumulative amount of unremitted earnings in respect of which dividend withholding taxes have not been provided is RUB 44,451 million ($609.9 million). The applicable withholding tax rate is 5% and the amount of the unrecognized deferred tax liability related to these unremitted earnings was RUB 2,223 million ($30.5 million) as of December 31, 2015. We plan to reinvest the substantial portion of the unremitted earnings for which deferred tax has not been provided in the anticipated acquisition of our Moscow headquarters as described in "Item 10: Additional Information—Material Contracts". We expect the amount of unremitted earnings to grow as our principal Russian operating subsidiary continues to generate net income. If we were required to record a deferred tax liability on an amount subsequently made available for distribution it may have a material adverse effect on our results of operations.

Ambiguities in Russian law regarding payments to individuals who are Yandex ad network partners may create employment-related tax obligations or require us to limit network partnership and may adversely affect our business, financial condition and results of operations.

        Ambiguities in Russian law make it difficult to structure payments to third-party individuals for Russian tax purposes. Many of our Yandex ad network partners are individuals who own and operate their own websites. In prior years, we had contractual relationships with third parties, including advertising agencies, who acted as aggregators and that made payments to individual Yandex ad network partners for fees to which they were entitled in connection with the ads we served on their websites. In the event that an aggregator failed to make any required tax withholding or otherwise comply with applicable laws in respect of such payments, the authorities could seek to hold us liable for personal and social taxes or VAT, and may not accept our deduction of these expenses. The tax authorities made such claims in our tax audit for the years 2010-2012. In 2014, we ceased working with aggregators, but it is possible that the tax authorities could make claims for the years 2013 and 2014, which are currently being audited.

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Risks related to doing business in other CIS countries.

        In addition to Russia, we currently have operations in other countries in the CIS, including Ukraine, Belarus and Kazakhstan. We may acquire or establish additional operations in additional countries of the CIS. In many respects, the risks inherent in conducting business in these countries are similar to those in Russia set out above.

Risks Related to Ownership of our Class A Shares

The price of our Class A shares has been and may continue to be volatile. Market fluctuations specific to Russia or developing markets or to high-growth technology companies generally may affect the performance of our Class A shares and could expose us to potential securities litigation, which could result in substantial costs and a diversion of our management's attention and resources.

        Macroeconomic and geopolitical events in Russia in recent periods have adversely affected the value of traded securities of companies with significant operations in Russia, including our Class A shares. In addition, the market for technology and other growth companies has generally experienced severe price and volume fluctuations that have often been disproportionate to the operating performance of those companies. These broad macroeconomic, geopolitical, market and industry factors may impact the market price of our Class A shares regardless of our actual operating performance.

        The trading price of our Class A shares has been and may continue to be volatile and subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include:

        Additionally, volatility or a lack of positive performance in the price of our Class A shares may adversely affect our ability to retain key employees, some of whom have been granted equity awards.

        In the past, following periods of volatility in the overall market and the market price of a company's securities, securities class action litigation has often been instituted against these companies.

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Such litigation, if instituted against us, could result in substantial costs and a diversion of our management's attention and resources.

        This volatility may affect the price at which holders of Class A shares may sell such shares and the sale of substantial amounts of our Class A shares could adversely affect the price of our Class A shares.

The concentration of voting power with our principal shareholders, including our founders, directors and senior management, limits your ability to influence corporate matters.

        Our Class B shares have ten votes per share and our Class A shares have one vote per share. As of March 17, 2016, our founders, directors, senior management (and their affiliates) and principal non-institutional shareholders together own 85.92% of our outstanding Class B shares and 5.22% of our outstanding Class A shares, representing in the aggregate 55.63% of the voting power of our outstanding shares. In particular, our founder, Mr. Volozh, directly or indirectly controls 76% of our outstanding Class B shares representing 47% of the voting power of our outstanding shares. For the foreseeable future, therefore, our founder, directors, senior management and their affiliates will have significant influence over the management and affairs of our company and over all matters requiring shareholder approval, including the election of directors, the amendment of our articles of association and significant corporate transactions, such as a sale of our company or its assets. Because of this multiple class structure, these persons will continue to exert significant influence over all matters submitted to our shareholders for approval even if they come to own fewer than 50% of our outstanding shares by number.

        In addition, our principal shareholders are parties to a shareholders' agreement that, among other things, requires them to vote to elect those directors nominated by our Board of Directors for election or re-election, and limits their ability to vote in favor of amendments of the anti-takeover provisions of our articles of association. This concentrated control limits your ability to influence decisions on corporate matters. We may take actions that our public shareholders do not view as beneficial or as maximizing value for them. As a result, the market price of our Class A shares may be adversely affected.

Our Board of Directors and our priority shareholder have the right to approve accumulations of stakes in our company or the sale of our principal Russian operating subsidiary, which may prevent or delay change-of-control transactions.

        Our Board of Directors has the right, acting by simple majority, to approve the accumulation by a party, group of related parties or parties acting in concert of the legal or beneficial ownership of shares representing 25% or more, in number or voting power, of our outstanding Class A and Class B shares (taken together). If our board grants its approval of such share accumulation, the matter is then submitted to the holder of our priority share, which has a further right of approval of such accumulation of shares. In addition, any decision by our Board of Directors to transfer all or substantially all of our assets to one or more third parties, including the sale of our principal Russian operating subsidiary, is subject to the prior approval of the priority shareholder.

        Any holding, transfer or acquisition by a party, group of related parties or parties acting in concert of the legal or beneficial ownership of Class B shares representing 25% or more, in number or by voting power, of our outstanding Class A and Class B shares (taken together), without the prior approval of our Board of Directors, first, and then the priority shareholder, will be null and void. The acquisition of shares in excess of the thresholds permitted by our articles of association will be subject to certain notification requirements set forth in our articles of association. Failure to comply with those terms would render the transfer of such shares null and void. In addition, the holders of such shares would not be entitled to the dividend or voting rights attached to their excess shares. The rights of our

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Board of Directors and our priority shareholder to approve accumulations of stakes in our company may prevent or delay change-of-control transactions.

Anti-takeover provisions in our articles of association and the shareholders agreement among our principal shareholders may prevent or delay change-of-control transactions.

        In addition to the rights of our board and of the priority shareholder to approve the accumulation of stakes of 25% or more, as described above, our multiple class share structure may discourage others from initiating any potential merger, takeover or other change-of-control transaction that our public shareholders may view as beneficial. Our articles of association also contain additional provisions that may have the effect of making a takeover of our company more difficult or less attractive, including:

        In addition, the provisions of the shareholders' agreement described above could have the effect of preventing or delaying a takeover of our company.

        The Dutch public offer rules, which impose substantive and procedural requirements in connection with the attempted takeover of a Dutch public company, only apply in the case of Dutch target companies that have shares listed on a regulated market within the European Union. We have not listed our shares, and do not expect to list our shares, on a regulated market within the European Union, and therefore these rules do not apply to any public offer for our Class A shares.

We rely on NASDAQ Stock Market rules that permit us to comply with applicable Dutch corporate governance practices, rather than the corresponding domestic U.S. corporate governance practices, and therefore your rights as a shareholder differ from the rights you would have as a shareholder of a domestic U.S. issuer.

        As a foreign private issuer whose shares are listed on the NASDAQ Global Select Market, we are permitted in certain cases to follow Dutch corporate governance practices instead of the corresponding requirements of the NASDAQ Marketplace Rules. We follow Dutch corporate governance practices with regard to the quorum requirements applicable to meetings of shareholders and the provision of proxy statements for general meetings of shareholders. In accordance with Dutch law and generally accepted business practices, our articles of association do not provide quorum requirements generally applicable to general meetings of shareholders. Although we do provide shareholders with an agenda and other relevant documents for the general meeting of shareholders, Dutch law does not have a regulatory regime for the solicitation of proxies and the solicitation of proxies is not a generally accepted business practice in the Netherlands. Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ's corporate governance rules.

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We do not comply with all the provisions of the Dutch Corporate Governance Code. This may affect your rights as a shareholder.

        As a Dutch company we are subject to the Dutch Corporate Governance Code, or DCGC. The DCGC contains both principles and best practice provisions for management boards, supervisory boards, shareholders and general meetings of shareholders, financial reporting, auditors, disclosure, compliance and enforcement standards. The DCGC applies to all Dutch companies listed on a government-recognized stock exchange, whether in the Netherlands or elsewhere, including the NASDAQ Global Select Market. The principles and best practice provisions apply to the board (in relation to role and composition, conflicts of interest and independency requirements, board committees and remuneration), shareholders and the general meeting of shareholders (for example, regarding anti-takeover protection and obligations of the company to provide information to its shareholders) and financial reporting (such as external auditor and internal audit requirements). The DCGC requires that companies either "comply or explain" any noncompliance and, in light of our compliance with NASDAQ requirements and as permitted by the DCGC, we have elected not to comply with all of the provisions of the DCGC. This may affect your rights as a shareholder and you may not have the same level of protection as a shareholder in a Dutch company that fully complies with the DCGC.

Because of the secondary listing of our Class A shares on the Moscow Stock Exchange, we are subject to additional disclosure and compliance requirements that may conflict with those imposed by the SEC and NASDAQ, and we may experience trade fluctuations based on arbitrage activities.

        In June 2014, we established a secondary listing of our Class A shares on the Moscow Stock Exchange. Pursuant to that listing, we and our insiders must comply with certain disclosure and other obligations that may differ in timing and substance from those applicable to our NASDAQ listing. In addition, many of the obligations imposed by the Moscow Stock Exchange are formalistic in nature, and that exchange has limited experience in the application of its requirements to companies incorporated outside Russia. As a result, we may not be able to comply with all formal obligations in a manner that is consistent with the requirements or interpretations of that exchange.

        In addition, this secondary listing may create opportunities for trading arbitrage, particularly in connection with currency fluctuations between the trading in U.S. dollars on NASDAQ and in rubles on the Moscow Stock Exchange, which could impact the trading price of our Class A shares.

Risks for U.S. Holders

We cannot assure you that we will not be classified as a passive foreign investment company for any taxable year, which may result in adverse U.S. federal income tax consequence to U.S. holders.

        Based on certain management estimates with respect to our gross income and the average value of our gross assets and on the nature of our business, we believe that we were not a "passive foreign investment company," or PFIC, for U.S. federal income tax purposes for the 2015 tax year, and do not expect to be a PFIC in the foreseeable future. However, because our PFIC status for any taxable year will depend on the composition of our income and assets and the value of our assets in such year, and because this is a factual determination made annually after the end of each taxable year and there are uncertainties in the application of the rules, there can be no assurance that we will not be considered a PFIC for the current taxable year or any future taxable year. In particular, the value of our assets may be determined in large part by reference to the market price of our Class A shares, which has fluctuated, and may continue to fluctuate, significantly. If we were to be treated as a PFIC for any taxable year during which a U.S. holder held our Class A shares, certain adverse U.S. federal income tax consequences could apply to the U.S. holder. See "Taxation—Taxation in the United States—U.S. federal income tax consequences to U.S. holders—Passive foreign investment company considerations."

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Any U.S. or other foreign judgments you may obtain against us may be difficult to enforce against us in Russia or the Netherlands.

        We have only very limited operations in the United States, most of our assets are located in Russia, our company is incorporated in the Netherlands, and most of our directors and senior management are located outside the United States. As a result, it may be difficult to serve process on us or these persons within the United States. Although arbitration awards are generally enforceable in Russia and the Netherlands, and Russian courts may elect to enforce foreign court judgments as a matter of international reciprocity and judicial comity, you should note that judgments obtained in the United States or in other foreign courts, including those with respect to U.S. federal securities law claims, may not be enforceable in Russia or the Netherlands. There is no mutual recognition treaty between the United States and the Russian Federation or the Netherlands, and no Russian federal law or Dutch law provides for the recognition and enforcement of foreign court judgments. Therefore, it may be difficult to enforce any U.S. or other foreign court judgment obtained against our company, any of our operating subsidiaries or any of our directors in Russia or the Netherlands.

The rights and responsibilities of our shareholders are governed by Dutch law and differ in some important respects from the rights and responsibilities of shareholders under U.S. law.

        Our corporate affairs are governed by our articles of association and by the laws governing companies incorporated in the Netherlands. The responsibilities of members of our Board of Directors under Dutch law are different than under the laws of some U.S. jurisdictions. In the performance of its duties, our Board of Directors is required by Dutch law to consider the interests of Yandex, its shareholders, its employees and other stakeholders and not only those of our shareholders. Also, as a Dutch company, we are not required to solicit proxies or prepare proxy statements for general meetings of shareholders.

        In addition, the rights of our shareholders are governed by Dutch law and our articles of association, and differ from the rights of shareholders under U.S. law. For example, Dutch law does not grant appraisal rights to a company's shareholders who wish to challenge the consideration to be paid upon a merger or consolidation of the company.

Item 4.    Information on the Company.

History and Development of the Company; Organizational Structure.

        Our founders began the development of our search technology in 1989, and launched the yandex.ru website in 1997. Our principal Russian operating subsidiary, Yandex LLC, was formed in 2000, as a wholly owned subsidiary of our former Cypriot parent company. In 2007, we undertook a corporate restructuring, as a result of which Yandex N.V. became the parent company of our group. Yandex N.V. is a Dutch public company with limited liability. Its registered office is at Schiphol Boulevard 165, 1118 BG, Schiphol, the Netherlands (tel: +31-20-206-6970). The executive offices of our principal operating subsidiary are located at 16, Leo Tolstoy Street, Moscow 119021, Russian Federation (tel. +7-495-739-7000).

        For a discussion of our principal acquisitions and disposals in 2015, see "Operating and Financial Review and Prospects—Recent Acquisitions—Recent Disposals."

Business Overview

Our Business

        Yandex is one of the largest internet companies in Europe, operating Russia's most popular search engine and its most visited website. Yandex's mission is to help people discover new opportunities in their lives. Based on innovative technologies, we provide the most relevant, locally tailored experience

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on all digital platforms and devices. Yandex also serves Turkey, Ukraine, Belarus and Kazakhstan. We generated 57.6% of all search traffic in Russia in 2015 and 57.8% in February 2016, according to Liveinternet.ru. In January 2016 our Yandex sites attracted 64.7 million unique visitors in Russia, and 18.2 million in Turkey, according to comScore MMX.

        Yandex is a technology company. Our products and services are based on complex, unique technologies that are not easily replicated. Benefiting from Russia's long-standing educational focus on mathematics and engineering, we have drawn upon the considerable local talent pool to create a leading technology company. For over 20 years, our team has been developing and optimizing search technology, which has formed the core of our business and helped Yandex become one of the best known brands in Russia. All of Yandex's products are designed to make people's lives easier and better.

        Our search engine uses our proprietary algorithms to provide relevant results, which we structure and present in an editorially neutral and user-friendly manner. With a focus on our principal geographic markets, our search technology allows us to provide localized search results across the geographies where we operate. We also feature "parallel" search, which presents on a single page the results from both our main web index and our specialized information resources, including images and videos, news, shopping and others.

        We offer convenient access to our search engine through personal computers, mobile phones, tablets, navigation and other digital devices. Our homepage provides a gateway to the wealth of information available online. Users can find answers to their explicit questions through our search box, as well as their implicit questions through current news, weather and road traffic reports, TV and movie schedules, personal email and other services.

        On mobile devices users can access our services through Search and Browser mobile apps as well as a variety of dedicated mobile apps of which the most popular are Navigator, Maps, Metro and Weather. Our Yandex Browser is also increasingly used as a gateway to Yandex services and we continue to cooperate with other browser vendors to provide our search engine as the default.

        We derive substantially all of our revenues from online advertising. We enable advertisers to deliver targeted, cost-effective ads that are relevant to our users' needs, interests and locations. Most of our revenues are derived from text-based advertising, which uses keywords selected by our advertisers to deliver ads based on a particular user query, the content of a website or webpage being viewed, or user behavior or characteristics. We derive a smaller portion of our revenues from display advertising, which consists of graphical and programmatic ads that appear on specific webpages. Our ads are clearly marked and are separate from our organic search results and from the content of the webpages on which they may appear. We do not serve intrusive ads, such as "pop-ups," that might detract from our users' experience. Other revenue streams come from our e-commerce offerings, auto classifieds and online taxi service.

        In addition to serving ads on our own search results and other webpages, we deliver ads to the thousands of third-party websites that make up our Yandex ad network. Through our ad network, we generate revenue for both our network partners and us and extend the audience reach of our advertisers. Our Yandex.Direct service, the largest automated, auction-based system for the placement of text-based advertising in Russia, makes it easy for advertisers to bid for desired keywords and to obtain the best price for their ads. We served ads for 394,000 advertisers in the fourth quarter of 2015 and 680,000 advertisers in the full year 2015, compared with 317,000 advertisers in the fourth quarter of 2014 and 558,000 in the full year 2014.

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        Prior to 2014, we operated as a single operating segment. In 2014-2015, we revised our organizational structure, separating several focus areas into product lines and geographies. As a result, our businesses are organized in the following operating segments:

Search and Portal

        We offer a broad range of search, location-based, personalized and mobile services that are free to our users and that enable them to find relevant and objective information quickly and easily and to communicate and connect over the internet, from both their desktops and mobile devices.

        Our search engine offers almost instantaneous access to the vast range of information available online. We utilize linguistics, mathematics and statistical analysis to develop proprietary algorithms that efficiently extract, compile, systematize and present relevant information to users. Our organic search results are ranked by computer algorithms based exclusively on relevance, and we clearly segregate organic results from paid results to avoid confusing our users. Our advertising services do not affect the way we generate or rank our organic search results because we do not accept payment for rankings or for inclusion in our organic search results, or allow parties to pay to include additional pages in our web indexes. Our anti-spam protection detects and downgrades pages with low informational content, made-for-advertising and "doorway" sites, pages with pop-under banners, content farms and scraped-content pages. We do not manipulate or interfere with our search algorithms in order to favor paid or affiliated sites or services, including those of our Yandex ad network partners, and do not adjust for political censorship.

        We supplement the results from our main web index with results from our "parallel" search system, which blends listings from all available Yandex specialized and vertical searches according to their relative relevance, such as Yandex.Images and Yandex.Video, Yandex.News, Yandex.Maps, and others. Yandex search is responsive to real-time queries, recognizing when a query requires the most current information.

        We also offer personalized search that provides search suggestions as well as search results that are highly aligned with the individual interests of our users. It combines the offline and online worlds and gives helpful suggestions in day-to-day life, such as what to read, where to go for a meal, what music to listen to, how to get home in the fastest possible way, where to book the cheapest flights, and much more. We seek to enhance our search capabilities by regularly expanding our algorithms to process

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additional languages. In 2015 we considerably increased the number of webpages we index. We continuously strive to develop innovative new concepts for our search engine.

        Our news aggregation and information service, the most visited online news aggregation service in Russia, provides a comprehensive media overview for our users in the countries we are present. We aggregate and present local, national and international news, currently from more than 6,700 news sources worldwide. The selection of news is fully automated and neutral from an editorial perspective.

        Yandex.Maps.    Our Yandex.Maps provide high-quality, detailed maps of more than 1,100 cities and towns in Russia and more than 20 cities in Ukraine, Kazakhstan and Belarus, as well as a detailed map of Turkey and satellite images of the whole world. In addition to graphical maps, we offer satellite images and hybrid maps (an amalgamation of satellite images and graphic maps), panoramic views, public transportation routes and driving directions in browsers and mobile device applications.

        We use our technology and licenses to create and edit maps from raw data, including satellite images, GPS coordinates and live user feedback. Our in-house team of skilled cartographers allows us to keep our maps up-to-date and to offer location-based services to our users. In 2015 we integrated our Public Map, a crowd-sourced service that presents user-generated local maps and data, into our main Map as a map editor feature that allows businesses to update information in real time.

        Yandex.Maps is also available via application programming interfaces, or APIs, which allow web developers to embed and use interactive maps in third-party websites, as well as to add extra layers of information—for example, to offer a map showing the location of a restaurant or a hotel.

        We also offer Yandex.Navigator, our free standalone mobile application providing turn-by-turn navigation. It incorporates a voice input function and a large set of voice commands that allow users to interact with the app without touching the screen. It is Yandex's most popular mobile app in terms of usage.

        Our Yandex.Maps and Yandex.Navigator apps both leverage our real-time congestion monitoring service, the most popular service of its kind in Russia.

        The Yandex.Transport mobile app provides users with real-time data on public transport in a number of Russian cities. The Yandex.Parking mobile app allows drivers to find available spots in partner parking spaces and pay for them right from the app.

        We have partnerships with local directories that allow us to integrate local business listings, recommendations and user reviews in our maps. Our Geo-Direct Business Directory service enables advertisers to pay for premium placement to enable users to find them more easily.

        Yandex.Mail.    Yandex.Mail provides users with fast and easy access to their email accounts, featuring a dynamic user interface. A number of features are available to enhance users' experience, including threaded and unthreaded views; direct access to Yandex.Disk, Yandex.Money, and other Yandex services; auto-tagging, which automatically recognizes and tags certain types of emails (for example, those from social networks, e-tickets and calendar events); smart preview, which allows our users to see the first line of any email in their inbox without having to open it; and Address Book, which recognizes both Latin and Cyrillic transliterations of names, and aggregates all emails from the same sender regardless of the language used. Yandex.Mail also features an unsubscribe button allowing users to opt out from mailing lists in a single click.

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        Our Yandex.Mail app is available to Android and iOS users. It allows users to work with multiple email accounts, filter and sort emails using Marker, our machine-learning technology that can recognize an email type, and compose emails offline, and offers a number of other features. Our mobile "push-email" technology allows for the instantaneous delivery of new emails to mobile inboxes.

        We seek to offer email free of spam and viruses, and our users can choose not to view ads on this service. Our users' accounts are protected by our proprietary server-side spam filtering solution, which performs comprehensive analysis of thousands of email properties, measuring their significance and ensuring precise filtering of spam, while distinguishing legitimate emails including legitimate automated or list mails. Our spam filter also adaptively "learns" a user's personal preferences so that it can effectively include or filter out emails based on their individual history.

        Yandex.Disk.    Our Yandex.Disk service is a cloud-based storage service that allows users to upload, store, read and share files in various formats and sizes. Users can store photos, videos or documents online so that they can be accessed at any moment from any device—PC, laptop, tablet or smartphone. The Yandex.Disk mobile app is available for iOS, Android-based and Windows Phone smartphones.

        We continue to transform Yandex.Disk from a storage and synchronization solution into a powerful tool to work with files of different types in the cloud. In 2015, we added Microsoft Office document editing functionality and photo albums to our existing set of tools, such as editing screenshots, adding filters to photos, listening to music files and watching videos.

        Our Yandex.Weather service allows our users to monitor weather conditions across the globe. In 2015 Yandex.Weather went through a major redesign as Yandex launched a service offering hyperlocal weather information based on our proprietary weather forecasting technology, Meteum. Powered by machine learning, it gives accurate forecasts for areas as local as specific parts of a city or even individual buildings. Yandex.Weather calculates a new forecast every time a user consults the service. It determines a person's position—down to their current geographic coordinates—and shows a fresh forecast for precisely that location. The new Yandex.Weather service currently offers hyperlocal weather forecasts for people living in 36 regions of Russia and is available on desktop, as well as through apps for iOS and Android.

How our users reach us

        Our homepage provides a gateway to the wealth of information available online. Users can find answers to their explicit questions through our search box, as well as to their implicit questions through current news, weather and road traffic reports, TV and movie schedules, and other services, presented right on our home page. We also offer localized homepages for specific geographic markets. We are focused on providing an increasing amount of content in these local languages and believe that we provide better support for local language search in these markets than our competitors.

        Our browser makes surfing the internet safe and convenient. Yandex Browser serves as an instant information source providing answers to some of the most popular queries. After typing a search in the browser's smartbox, the user can see a snippet about what they are searching for—a thing, a product, a person or an event—without having to look at the search results page. The most recent version of our browser is focused on the security and privacy of our users and incorporates our new "Protect" technology, which protects users from the most common online dangers: phishing, malware, viruses and

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interception of personal data. Protect also keeps users' personal data safe when they use an unencrypted Wi-Fi network, such as those in many cafés or airports. It routes Yandex Browser traffic through a protected server and makes spying on the data almost impossible.

        The combined share of searches processed through Yandex Browser in Russia reached 16.0% in December 2015, and our browser's share in terms of the number of visitors (cookies) on the Russian browser market was 8.9% in December 2015, according to Liveinternet.ru.

        Yandex Browser is based on the Chromium open source license, Yandex's own technologies and cloud-based services. The WebKit engine, supported by many browser developers, is supplemented by Opera Software's Turbo technology, which we license, speeding up the download of pages even over slow connections. Our browser also provides our proprietary language translation capabilities, is able to resume interrupted file downloads, has an automatically generated tableau menu, synchronization of bookmarks and history between desktop and mobile versions, and "quick call" capability, among other things.

        Aside from the desktop version, we offer mobile versions of Yandex Browser for iOS and Android smartphones and tablets.

        We offer a number of apps for mobile devices running iOS, Android and Windows Phone operating systems. The most popular are Yandex.Navigator, Yandex.Maps, Yandex Browser and Yandex.Search. Other popular apps include Yandex.Metro, Yandex.Transport, KinoPoisk, Yandex.Mail, Yandex.Weather, Yandex.Market, Auto.ru, Yandex.Disk, Yandex.Music, Yandex.Timetables, Yandex.Translate and Yandex.Taxi. We are continuing to expand the scope of our mobile offerings with respect to both apps and platforms, with Yandex.Transport, Yandex.Taxi and Yandex search app for Android being among our most rapidly growing apps in terms of the number of monthly users in 2015.

        The percentage of our total search traffic that was generated from mobile devices increased from approximately 24% in the fourth quarter of 2014 to approximately 27% in the fourth quarter of 2015, while the percentage of our search revenues generated from mobile devices increased from approximately 18% to approximately 22% between those periods.

        In order to provide easier access to our services, we partner with other browser developers. Yandex has one of the default search positions in the Opera browser in Russia. In 2014 we again became the default search engine in Mozilla Firefox in Russia, and in 2015 the partnership was expanded with Yandex becoming the default search engine on Mozilla Firefox in Turkey. In November 2015, we announced a strategic cooperation agreement with Microsoft to make it easy for people in Russia, Belarus, Kazakhstan, Ukraine, Turkey, and several other countries in the region to upgrade to a custom experience with Windows 10, where Yandex will be offered as the default homepage and search engine for the Microsoft Edge browser as well as Internet Explorer across Windows 10 devices.

        Yandex is currently included as the default search engine on a very limited number of mobile handsets sold in Russia, and as one of the search options in the Safari browser on Apple devices running iOS7 and later versions of the system. We believe that Google remains the default search engine on all iOS devices and almost all Android devices. Our services and applications are also distributed by a limited number of OEMs, retailers, browser makers, and telecom operators in Russia. We believe that distribution is an important part of our overall marketing strategy and serve to increase our user base.

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Our Monetization and Advertiser Services

        We offer advertisers both text-based advertising and display advertising.

        Text-based ads are principally targeted to the particular user query on our search engine result pages, and on search result pages of our partners, as well as to the content of a particular website or webpage being viewed, or to user behavior or characteristics. Such ads are clearly marked as paid advertising and are separate from our organic search results. Display ads consist of graphical and programmatic ads that appear on specific pages, and are generally used to increase brand awareness or generate demand for particular products or services.

        Most of our revenues are generated from text-based advertising, on a pay-per-click basis, with a smaller portion generated from display advertising, based on the number of impressions delivered. In addition to targeting ads on the basis of user queries and website content, we are also able to target ads on the basis of users' demographics as well as behavioral patterns, characteristics and locations, and have developed algorithms that can predict with a high degree of accuracy the age and gender of a user based on behavior, as well as the probability of a click. We actively monitor the ads we serve, both automatically and manually, in order to help ensure the relevance of the ads as well as compliance with applicable laws.

        We monetize our search engine and many of our other services primarily through text-based advertising. Yandex.Direct is our auction-based advertising placement service, which uses the most advanced auction theory and relies on our distributed infrastructure to process millions of auctions every day. Yandex.Direct lets advertisers cost-effectively deliver relevant text-based ads targeted at particular search queries or content on Yandex websites or third-party websites in the Yandex Advertising Network. Yandex.Direct enables advertisers to present ads to users at the precise moment they are looking for information related to the advertiser's product or service. Advertisers may use our automated tools, often with little or no assistance from us, to create text-based ads, bid on keywords that are likely to trigger the display of their ads, and set total spending budgets. Yandex.Direct features an automated, online sign-up process that enables advertisers to create and quickly launch their advertising campaigns. Advertisers may also work with our sales staff to design and implement more specialized or sophisticated advertising campaigns. We also offer a Yandex.Direct mobile app to better facilitate advertisers' access to our service to manage their advertising campaigns.

        Text-based ads on our desktop search engine results page (SERP) appear in one of several general categories: top placement (appearing above the organic search results and featuring up to three paid links), southern block (appearing below the organic search results and featuring up to four paid links), or guaranteed placement and rotation (both appearing to the right of the organic search results, up to nine paid links in total). Text-based ads on our mobile SERP appear in top placement (appearing above the organic search results and featuring up to two paid links) and one paid link, appearing below the organic search results.

        In September 2015 we introduced the most significant development in the history of Yandex.Direct, changing our auction system and introducing new ranking rules for paid search results. Instead of a generalized second-price auction (GSP), which we used previously, Yandex.Direct now uses a Vickrey-Clarke-Groves (VCG) auction to serve ads on our SERP.

        VCG auction gives bidders an incentive to bid their true valuations. In the VCG auction, the cost-per-click price is based on the difference between the amount of traffic in different ad positions. If an ad in the top position yielded 15% more clicks than it would have done in the second position, the advertiser would pay only for these additional clicks if their ad moved up from the second position to the top. In contrast to the second-price auction, the cost of baseline clicks in the VCG auction remains

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the same regardless of the ad's position. The average cost per click grows in proportion to the increasing amount of traffic, making advertisers compete for additional traffic.

        Together with VCG implementation, we made changes to our ranking algorithms which, besides bid and click-through-rate, also takes into account relevancy coefficient, allowing more relevant ads to be ranked higher. Relevancy is a function of our assessment of a number of factors, including the wording of the ad copy, relevance to the search query, and quality of the landing page. We believe that the new ad ranking rules further enable Yandex.Direct to serve ads that are most relevant to users' search queries. New ranking formula was implemented both on Yandex SERP and on the Yandex Advertising Network.

        Our web analytics tool, Yandex.Metrica, is the most popular web analytics system in Russia. It allows advertisers in near real-time to analyze the "post-click" behavior of users to evaluate the key efficiency parameters of their advertising campaigns—for example, to analyze the conversion rate, or the cost of attracting a visitor who performs the desired action. Based on this data, our advertising customers are able to choose the most efficient tools and settings for their advertising campaigns. In 2015 we launched Metrica 2.0 which offers wide-ranging possibilities to analyze this data. This version offers more than 50 parameters that can be manipulated by users as they wish, allowing site owners to create custom reports based on any set of parameters in just a few clicks.

        In addition to auction-based sales of text-based ads, we offer display ads, generally designed to build brand awareness and promote products and/or points of sale. We allow advertisers to place display ads on our homepage as well as several other services, including Yandex.Mail, Yandex.News and Yandex.Music. In the previous years, more than half of our revenues from display advertising were generated from our homepage banner. However, with the growth of our display ad network, share of revenues from our homepage banner decreased below the 50% level in 2015. Display ads are generally priced on a cost-per-thousand impressions, or CPM, basis. We also offer a media-contextual banner, a display product that is only shown to users who search for certain topics on Yandex.Search or visit sites of the Yandex Advertising Network dedicated to a particular area of interest.

        We have been developing a range of programmatic advertising products, which utilize real-time bidding technologies to provide effective solutions to our publisher and advertiser partners. Yandex RTB ad exchange connects to our performance-based demand-side platform (DSP) Yandex.Direct, to our display-based DSP "AWAPS" as well as to integrated third party DSPs. Our RTB ad exchange leverages the wealth of targeting data generated by our own Data Management Platform, including Crypta, search and browsing history, and so on. The RTB ad exchange is connected to many of our Yandex Advertising Network partners who have chosen to display ads from our RTB ad exchange as well as or in lieu of our regular Yandex.Direct ads. In addition, through the acquisition of ADFOX, we provide a supply-side platform to our publisher partners. ADFOX is able to mediate in real-time between programmatic display ads from AWAPS, performance-based ads from Yandex.Direct, ads from integrated third party DSPs and publisher's own direct sales.

        Within Yandex.Direct, we recently launched Dynamic ads, which automatically generate ad elements from already existing advertisement and compile them into new ads—as a result, each advertised product and a corresponding search query get an individually tailored ad. This format is currently available in beta and has proven especially effective for online retailers. In the near future we plan to roll out this capability to many other client categories. Dynamic ads appear in Yandex search results and on Advertising Network sites on both desktop and mobile.

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        In early 2016 we enhanced Yandex.Direct with smart banner ads—display ads with dynamic content that is personalized for individual users based on their interests. To choose which product to display, Yandex analyses a user's browsing history—which sites they visited, what they looked for and which products they looked at. As a result, our smart banner can help attract new clients and draw back those who visited a site without making a purchase. The service is currently available in beta.

        Our Yandex Advertising Network partners include search websites, for which we provide search capabilities, as well as contextual network partners, where we serve ads based on user behavior or characteristics or website content. Among our partners are some of the largest Russian websites, including Mail.ru, Rambler, Bing, Livejournal, Avito.ru and others.

        We help third-party website owners monetize their content while extending the reach of our advertisers. Through the Yandex Advertising Network, our partners can deliver text-based and display ads on their search results pages or websites. Our technology delivers relevant ads by analyzing the search results or content of partner websites and pages, as well as the search history, behavioral patterns and location of users. Our advertising algorithms use our proprietary MatrixNet technology, which optimizes the click-through rate on our network through improved click prediction. In order to provide the best user experience, we allow our users to opt out of personalized ad targeting on network partner sites by changing the settings through our homepage.

        We screen applicants for the Yandex Advertising Network and favor websites with high-quality content and stable audiences. We believe that we will continue to attract high-quality websites to our network through our solid relationships with advertisers, our track record in monetizing internet traffic and content, and our attractive revenue-sharing propositions.

        We share a significant portion of the revenues generated from ads displayed on the sites of Yandex Advertising Network partners with those partners. To date, we have not guaranteed any minimum revenues to our network partners but may consider doing so on a selective basis in the future.

        Through partnerships with dozens of regional business directories, we compile and update our own Yandex.Spravochnik—a business directory covering the whole of Russia and other neighboring countries. We supplement the business directory with data mined from the web, as well as with direct submissions from participating businesses. Yandex.Spravochnik data appear both in our search results and on our maps, including our mobile application, in response to search queries within the specified area. Our Geo-Direct Business Directory service allows businesses to pay for a premium placement on our maps, including maps returned in our search results, highlighting their address and allowing users to access their contact details with a single click. This advertising product is designed primarily for small and local businesses—for example, hairdresser salons and auto repair shops, as well as restaurants or bank branches. We offer this service for a fixed price on a fixed-term basis, and it can be ordered through our regional partners and advertising agencies, as well as directly through our online interface.

E-commerce

        Yandex.Market.    Our Yandex.Market e-commerce gateway service gives retailers an additional platform to reach customers seeking specific retailer, product or price information. Product search on Yandex.Market is designed to deliver the most relevant shopping results to our users. Retailers submit their product catalogs and price lists to us in a structured online format, enabling us to provide detailed information in response to relevant user queries, either through our search engine or our Yandex.Market service. Yandex.Market, incorporates our proprietary recommendation technology,

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which is widely used across other Yandex products and provides users with personal product recommendations.

        Yandex.Market is priced on a cost-per-click (CPC) basis, similar to Yandex.Direct. Yandex.Market also operates a cost per action (CPA) model offering participants a single shopping basket for the service, including a unified basket for purchases from various partnering shops.

        Launched in 2000, Yandex.Market is the most popular such service in Russia, providing product information, price comparisons and consumer generated reviews of products and online retailers. We aggregate price, product and availability information from thousands of active online and "brick and mortar" retailers, and currently feature more than 90 million offerings in more than 2,000 product categories from over 19,000 participating retailers.

        Yandex.Market aims to accommodate the needs of international retailers wishing to sell their products to Russian customers. International web stores can showcase their offers and target those customers who look to buy products that may not be available within Russia. In 2015, we added an option to allow searches for goods in international stores only. As of today, any online store, domestic or international, can join Yandex.Market by providing customers with a landing page in Russian and an opportunity to have their purchase delivered to a Russian address, as well as an opportunity to pay for purchases in Russia via a bankcard or electronic money. Dozens of retailers, including China's LightInTheBox and DHGate, Germany's Kidsroom.de, the UK's ASOS, the US's Revolve, and Italy's Yoox, currently offer their products to Russian consumers via Yandex.Market.

        In 2015 we launched Yandex.Delivery. The service aggregates a number of third party delivery carriers, courier services, pick-up points and automated self-service kiosks to accommodate delivery of goods across Russia, giving our retailer customers a single point of entry. Our retailer customers can utilize our software to display delivery options, including price and time of delivery, right on their website. The service helps our customers boost conversion rates, cut logistics costs and expand their geographic reach.

        Yandex.Delivery currently offers access to deliver services of five major carriers: Axiomus, Boxberry, STRIZH, DPD and Russian Post.

Classifieds

        Yandex's Classifieds business unit currently includes Auto.ru, Yandex.Auto, Yandex.Realty, Yandex.Jobs and Yandex.Travel.

        Auto.ru.    Auto.ru is one of the most popular automobile-related Russian websites with 16 million unique monthly visitors and 59 million monthly visits in December 2015, according to Yandex.Metrica. It operates one of the largest catalogs for new and used vehicles in Russia. Auto.ru's history dates back to 1996. Yandex acquired Auto.ru in 2014 and has since been working to improve the service for the benefit of both its users and advertisers.

        Auto.ru allows users, both private individuals as well as auto dealers, to post listings of automobiles, motorcycles and commercial vehicles. Auto.ru offers a number of filters that allows potential buyers to quickly find the exact item they are looking for. Placing a limited number of ads is free for private users and there is a wide variety of options to promote an ad within the system, such as VAS (value added services).

        Currently, we are in the process of integration of Yandex.Auto into Auto.ru. Yandex.Auto is our proprietary service that provides our users with various tools to search through auto classifieds of third party provides within the service. After the integration is completed, technologies and tools, which are currently used in Yandex.Auto, will be implemented into Auto.ru.

        Auto.ru is also available on mobile through the mobile web and as apps in iOS and Android.

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        Yandex.Realty is our real estate classifieds service, acting as both an aggregator of ads from other websites and a place where private individuals and realtors can place their listings directly. The service provides listings for both sale and rental of apartments, rooms, houses and vacation homes. In 2015 we added the option to place listings for flats in newly-built or under-construction apartment complexes in Moscow. Yandex.Realty is also available as an app for iOS and Android.

        Yandex.Jobs, our service for job seekers, was launched in 2010 and in 2015 underwent a complete redesign, with the new version initially launched as a mobile app for Android and iOS. The focus of the new version is on blue collar and service industry jobs. Job search is highly simplified and users can dial the potential employer directly from the app. The service aggregates vacancies from a number of partners.

        Yandex.Travel.    In March 2015 we launched our tour aggregator Yandex.Travel service. It allows users to search for a vacation using multiple criteria and taking their personal preferences into account. Its unique feature is the ability to compare the price of a holiday provided through an agency with a "do it yourself" trip where users buy tickets and book hotels on their own. We also provide information such as hotel reviews that we generate using our fact extraction technology.

Taxi

        Yandex.Taxi is our on-demand transportation service. It is the most popular online transportation service in Russia, with leadership in Moscow, Saint Petersburg, and many other cities. We currently operate our service in 12 cities across Russia, including Yekaterinburg, Perm, Novosibirsk, Samara, Sochi and many others. In early 2016 we expanded beyond Russia by launching our service in Minsk, Republic of Belarus.

        We are focused on providing the best customer experience, including an easy to use mobile app, extremely short arrival times and affordable prices. We leverage Yandex.Navigator and Yandex.Maps to provide intelligent order assignment and routing algorithms, allowing us to provide industry-leading arrival times of approximately 5 minutes. While economy class cars is our leading car vehicle category, we also provide business class sedans, minivans, and cars with child seats.

Experiments

        Aside from our core business and our newly established business units, where we see a clear potential for monetization, we have a number of divisions that we currently consider to be experimental in nature. We believe that some of them have a good chance of transforming into separate business units in the future.

        Our Media services unit consists of a number of services that provide our users with streaming audio and video, entertainment and hyperlocal weather data. These are:

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        In December 2014, we launched Yandex Data Factory (YDF), aimed at developing big data analytics solutions for companies in finance, retail, telecom, manufacturing, healthcare and other industries. Our YDF team consists of machine learning and data analytics experts who use data science to improve businesses' operations, revenues and profitability. Yandex's unique proprietary technologies applied in our own products are now available to help businesses utilize accumulated masses of data to their benefit, including through tailored cross-sell and upsell recommendations, customer churn prevention, demand forecasting and manufacturing process optimization.

        As of the end of 2015, Yandex Data Factory had already executed a number of successful projects for Russian and international companies, including AstraZeneca, Intel, Wargaming.net, Rosavtodor, Magnitogorsk Iron & Steel Works (MMK), Sberbank, and Vimpelcom's Beeline. The projects varied from identification of potential churners for Wargaming.net, to traffic and accidents prediction for Rosavtodor and optimisation of ferroalloys consumption during steel production for MMK.

        In 2015 we launched two products designed to help our users discover new content—Yandex Zen and Yandex Launcher.

        Yandex Zen is a mobile product that recommends interesting content from different media. The Yandex Zen personalized feed is integrated with other Yandex mobile applications (Launcher and Browser) and available as a Software Development Kit (SDK) for third party mobile software developers. Yandex Zen finds themes and articles most relevant to each user and also takes into consideration a user's feedback for each recommendation. The service is based on machine learning, natural language processing and computer vision experience in web search as well as on our proprietary recommendation technology, which is also used in our media services and in Yandex.Market.

        Yandex Launcher is our new take on the Android interface, focused mostly on low-end devices. For that reason the product was initially launched in Latin America where such devices make up a majority of sales. Yandex Launcher has a number of helpful features, from grouping apps on a user's smartphone into convenient categories, to recommending new apps to the user based on his or her

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preferences. Yandex Zen is accessible in Yandex Launcher with just one swipe. This feature also uses our recommendation technologies. After an initial launch in Latin America we also released the product in Russia and other countries.

        Aside from Russia, Ukraine, Belarus and Kazakhstan, Yandex operates in Turkey, providing users in these countries with localized versions of Yandex's major products such as search, mail, maps, traffic, weather and browser. In 2011 we opened an office in Istanbul and launched the portal yandex.com.tr in Turkey. The main focus of our Turkish office is to promote and adapt our core services, mainly search and geo-informational services, for Turkish users. In January 2016 our Yandex sites attracted 18.2 million unique visitors in Turkey, while our desktop search share in Turkey was at 6.6% in January 2016, according to comScore MMX, comScore qSearch.

Our Technology

        Yandex is a technology company. Our products and services are based on complex, unique technologies that are not easily replicated. Most of Yandex's services use machine learning—including in the ranking of search results, serving online advertisements, and performing translations. In 2009 Yandex developed and implemented its own machine learning method—MatrixNet.

        Thanks to speech recognition technology, users can communicate verbally with the Yandex.Navigator street navigation app instead of typing in addresses manually. The users of our Yandex.Mail service can quickly find certain e-mails in their accounts—such as tickets, appointment or meeting notifications, or information about discounts—all automatically marked by our fact extraction technology. We use our own computer vision methods to find similar images.

        We seek to ensure the speed and reliability of our services regardless of the user's location by operating our own CDN of points of presence in major cities throughout Russia and the other countries in which we operate. This network allows us to support reliable 24/7 operations, including server-based computations, research and development work, and user and advertiser services. We use proprietary computer architecture to link these clusters of servers, as well as proprietary computational software that operates across these distributed servers, including software that enables us to deploy and monitor software across our systems. This allows us to use relatively inexpensive off-the-shelf servers as the foundation of our robust and effective systems for redundant, distributed data storage, retrieval and distributed calculations. Geographic distribution of our servers decreases the cost of internet usage for our users, increases the access speed for our services and increases the stability and dependability of our service offerings. This structure provides redundant fail-safe capacity such that the failure of a single facility would not cause our websites to stop functioning.

Advertisers

        We served ads for 394,000 advertisers in the fourth quarter of 2015 and more than 680,000 in the full year 2015, compared with 317,000 in the fourth quarter of 2014 and 558,000 in the full year 2014. Our advertisers include individuals and small, medium and large businesses throughout the countries in which we operate, as well as large multinationals. Small and medium-size enterprises purchase the bulk of our text-based advertising. No particular advertiser accounted for more than 1.2% of our total revenues in 2013, 2014 or 2015.

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Sales and Advertiser Support

        We have an extensive sales and support infrastructure, with sales offices in a number of cities in Russia and Ukraine, as well as Lucerne, Switzerland, Newburyport, Massachusetts, USA, and Shanghai, China. We attract advertising customers through both online and offline sales channels.

        The substantial majority of our advertisers use our automated Yandex.Direct service to establish accounts, create ads, target users and launch and manage their advertising campaigns. We provide email and telephone support for these customers. Our sales team focuses on attracting and supporting companies in Russia with the largest advertising budgets. These companies may request strategic support services, which include a dedicated accounts team, to help them set up and manage their campaigns. Our sales team specialists are able to help advertisers with tasks such as selecting relevant keywords, creating effective ads and audience targeting, thus measuring and improving advertisers' return on investment.

        The Yandex ad network follows a similar model. Most of the websites in the network submit their applications through Yandex.Direct's automated partner interface. Our direct sales force focuses on building relationships with major websites. Our support team concentrates on helping Yandex ad network partners get the most out of their relationship with us. We also have relationships with different advertising sales agencies placing text-based and display advertising.

Marketing

        We engage in significant marketing efforts directed first and foremost at internet users, as well as advertising agencies, advertisers and webmasters. Our marketing efforts are focused above all on delivering an optimal user experience with every Yandex product and service. We believe that satisfied users are the best and most credible advocates for our services. In order to improve user satisfaction and loyalty and to continue to use our products and services as marketing tools, we constantly experiment with and improve the design, technology and interface of these products and services. Although we believe that word of mouth is the best advertising strategy, we also view advertising campaigns in online and traditional media as an important element of our efforts to promote our brand, as well as key services, such as our browser, in Russia and the other CIS countries where we are present, as well as in Turkey. We also plan to invest heavily into our three business units, including E-commerce, Taxi and Classifieds, to grow customer awareness, increase user base, increase usage in the existing markets and penetrate into other geographies.

Competition

        We operate in a market characterized by rapid commercial and technological change, and we face significant competition in many aspects of our business. We currently operate principally in Russia, Ukraine, Belarus, Kazakhstan and Turkey. We face competition from global players such as Google and local players such as Mail.ru, both of which offer proprietary search and other services.

        Globally, we consider Google to be our primary competitor. Google launched its Russian-language search engine, google.ru, in 2001 and established its first office in Russia in 2006. In addition to its search solutions, Google offers online advertising and information and other search services similar to ours, including services similar to Yandex.Direct and Yandex.Maps. We expect that Google will continue to use its brand recognition and financial and engineering resources to compete with us.

        In terms of domestic players, our principal competitor is Mail.ru. In early 2010, Mail.ru launched its own search platform, and in July 2013 announced that it had fully switched to its proprietary search technology in organic search results. We have entered into a partnership with Mail.ru pursuant to which Mail.ru uses the Yandex.Direct advertising system to power paid search results on its properties.

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Mail.ru offers many communication services, including Russia's most popular webmail social networking and messenger services.

        The following table presents a comparison of Russian search market share, according to Liveinternet.ru, based on search traffic generated:

 
  2013   2014   2015  

Yandex

    61.8 %   60.9 %   57.6 %

Google

    26.2 %   29.3 %   34.5 %

Mail.ru

    8.6 %   7.3 %   6.3 %

        We also face competition from the Russian and international websites of Microsoft and Yahoo!, as well as other established companies and start-ups that are developing search and online advertising technologies. We also compete with online advertising networks, such as Google and Begun, which direct text-based advertising on a number of popular Russian websites.

        We believe that social networking sites, such as Facebook, Twitter, and Mail.ru's Vkontakte, Odnoklassniki and My World services, will become significant competitors for online ad budgets. These sites derive a growing portion of their revenues from online advertising, and are experimenting with innovative ways of monetizing user traffic. In light of their very large audiences and the significant amount of proprietary information they can access and analyze regarding their users' needs, interests and habits, we believe that they may be well positioned to offer highly targeted advertising which could create enhanced competition for us. The popularity of such sites may also reflect a growing shift in the way in which people find information, get answers and buy products, which may result in increased competition for users.

        In certain vertical areas, we compete with niche services, including e-commerce, video search, online news aggregators and dictionaries, real estate and automobile services, and specialized search apps for mobile devices. Our Yandex.Taxi service competes with Gett and Uber as well as a number of regional players across Russia. Our e-commerce services face competition from a number of local players acting as both e-shops and marketplaces, Avito, which acts as a marketplace for e-shops and private individuals, and a number of international players popular with Russian users, especially those from China such as Aliexpress. Our Classifieds services competes with Avito in most areas as well as a number of players present in specific industries such as CIAN in real estate and Drom.ru in automobile sales.

        We also face competition from other search and service providers in establishing relationships with device manufacturers, such as mobile and tablet computer makers, and access providers, such as internet service providers. Such companies have a significant degree of control over the distribution of products and services, including by offering or establishing exclusive arrangements for "default" search features or other services and bundling them with their offerings. Our users typically have direct relationships with these companies, and may be influenced by economic or other factors in deciding which search or other services to use.

        In February 2015, we made a formal request to the Russian Federal Anti-Monopoly Service (FAS) to open an investigation into whether Google is using its dominant position in mobile operating systems to promote its search and services through its requirement that device manufacturers bundle Google's Android operating system with Google applications and services. On September 14, 2015, FAS declared that Google had breached competition law and had been abusing its market dominance on Android devices. Google was ordered by the FAS to amend agreements with smartphone vendors to allow third-party services such as Yandex search to be installed. In December 2015 Google appealed FAS's decision to the Arbitrazh Court of Moscow. In March 2016 the appeal was dismissed. The possibility of a further appeal remains, however.

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Science and Education

        Our team of specialists represents many scientific disciplines, including mathematics, data analysis, programming and linguistics. Besides working on products and technologies at Yandex, some of our experts teach, lecture and train students and young specialists.

        We also run our own educational programs. The Yandex School of Data Analysis, offering free courses for university graduates and senior students, has been running since 2007. The school trains specialists in internet data processing, data analysis and fact extraction. The school's graduates find employment at Yandex and many other companies. Yandex also has schools for project managers, user interface developers and other specialists in IT. We also partner with Russia's leading research centers and universities, including the Moscow Institute of Physics and Technology and the Higher School of Economics. Yandex's experts give lectures to high school students. We sponsor a number of school contests in computer programming, mathematics and linguistics.

        Russia's largest technology conference, Yet another Conference, which is organized by Yandex every year, gathers industry experts from all over the world. We also run scientific conferences on machine learning, as well as seminars, lectures, workshops and master classes for those who wish to make or have already made a career in the internet industry.

Employees and Workplace Culture

        We place a high value on technological innovation and compete aggressively for talent. We strive to hire the best computer scientists and engineers, as well as talented sales, marketing, financial and administrative staff. We seek to create a dynamic, fulfilling work environment with the best features of a "start-up" atmosphere, encouraging equal participation, creativity, the exchange of ideas and teamwork.

        Our total headcount decreased as a result of cost efficiency procedures from 5,616 at December 31, 2014 to 5,463 at December 31, 2015. As of December 31, 2015, we had 3,286 employees in product development, 1,759 in sales, general and administration, and 418 in cost of sales.

Intellectual Property

        We rely principally on a combination of trademark, copyright, related rights, patent and trade secret laws in Russia and other jurisdictions as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brand. We enter into confidentiality and patent assignment agreements with our employees and consultants and confidentiality agreements with other third parties, and we rigorously control access to our proprietary technology.

        Our patent department is responsible for developing and implementing our group-wide IP protection strategy in selected jurisdictions. We have filed more than 250 patent applications to date, of which more than 10 have resulted in issued patents. We also have internal procedures for invention disclosures, patent filings, patent acquisitions, freedom-to-operate analyses and patentability searches.

        Yandex is a registered well-known trademark in Russia for certain services (classes 35 and 38 under the International Classification of Goods and Services) among relevant consumers on the basis of intensive use. Under Russian law, the protection granted to well-known trademarks is extended to non-homogeneous goods and services if customers associate specific use of the designation by third parties with the rights holder and the rights holder's legitimate interests are infringed. Yandex is also a registered trademark in Ukraine, the United States, the European Union and other countries under the Madrid Agreement and Protocol. We have other registered trademarks in Russia. We continue to file applications to register new trademarks and widen the country coverage of our existing trademarks. Most of the software used by our services or distributed by Yandex to our users is either developed by our employees or by independent contractors who transfer all rights to Yandex.

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        We enter into written license and use arrangements with providers of a significant portion of the content we offer. Our agreements with most of the news content providers in Russia are on "content-for-traffic" terms, pursuant to which we obtain access to news content for free in consideration of the user traffic that accesses the content providers' websites through our search engine. We license or purchase other additional content. We do not knowingly include content on our websites that we do not have the legal right to include.

        We do not own the content generated or posted by users on our websites. As with all websites that host user-generated content, we are potentially liable for any intellectual property infringement committed by the creator of that content. If we receive a complaint from a party that user-generated content on our websites infringes that party's copyright or related rights, we examine the content in question. If we are unable to confirm the violation independently, we request a formal letter of complaint from the notifying party. We then contact the party that has posted the content, and give that person two options: either remove the content, or allow us to provide his or her personal details to the notifying party so that that party may defend its rights. In the event of any court decision in the matter, we comply with the decision. If the potentially offending party does not respond, we remove the content.

Facilities

        Our principal operating subsidiary currently leases a total of approximately 52,000 square meters in a single location in central Moscow that serves as our group's headquarters. We or our operating subsidiaries also lease or own office space in a number of cities in Russia and Ukraine. We also lease offices in Newburyport, Massachusetts; Istanbul, Turkey; Lucerne, Switzerland; Minsk, Belarus; Berlin, Germany; and Schiphol, The Netherlands and Shanghai, China. We operate data centers in Moscow and other regions of Russia, as well as in Finland. We have points of presence in a number of cities in Russia and elsewhere. Taking into account the projected demand for our services, we continuously evaluate the capacity and locations of our data centers to determine the most cost-effective manner of delivering reliable services to our users.

        In February 2016, we signed a framework agreement pursuant to which we will become the sole owner of a newly-created company that will hold title to the office complex in central Moscow that houses our Russian headquarters. The complex is spread across approximately 4 hectares and includes 7 buildings with around 80,000 square-meters of Class A and B office space, 65% of which is currently occupied by us. We will continue to lease a portion of the space to third-party tenants in the medium-term, while securing access to additional space for long-term growth as we expand. We expect the deal to be closed in the second half of 2016.

Government Regulation

        We are subject to an extensive and constantly developing legal framework resulting in a number of laws and regulations in Russia and other jurisdictions applicable to the internet business. As explained in more detail below, there are also a significant number of additional laws and regulations currently being debated and considered for adoption in Russia and other countries where we operate which, in the event of adoption, might require us to make substantial adjustments to our business practices.

Advertising Regulation

        The principal Russian law governing advertising, including online advertising, is the Federal Law No. 38-FZ "On Advertising," dated March 13, 2006 (as amended) (the "Russian Advertising Law"). The Russian Advertising Law prohibits advertisements for certain regulated products and services without the required certification, licensing or approval. Advertisements for products such as tobacco, pharmaceuticals and medical equipment, food supplements and infant food, financial instruments or

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securities and financial services as well as incentive sweepstakes and advertisements aimed at minors and some other products and services must comply with specific requirements and must in certain cases be accompanied by certain required disclaimers. The Russian Advertising Law also prohibits the advertising of alcohol on the internet as well as in periodicals, among other platforms. In addition, the distribution of advertisements over the internet (for example, by email) may require the prior express consent of recipients. In 2014, new regulations were also adopted to limit or in certain cases to prohibit the advertising of medical services: these restrictions were loosened to some degree in June 2014. New regulations of foreign exchange brokers which came into force in 2015 could limit the amount of advertising of their services. In some cases, violation of the Russian Advertising Law can lead to civil action by third parties who suffer damages, or administrative penalties imposed by the Federal Antimonopoly Service of Russia (the "FAS"). Further amendments to legislation regulating advertising may impact our ability to provide some of our services or limit the type of advertising we may offer.

        We seek to comply with all advertising laws and regulations. At the same time, the application of the advertising laws, in particular in relation to products or services requiring certification, licensing or approval, can be ambiguous and inconsistent. The application of these laws in an unanticipated manner, or the failure of our compliance efforts, may expose us to substantial liability as distributors of advertising and may restrict our ability to provide some of our services.

        Other laws or interpretations of laws, including those of foreign jurisdictions, may also restrict advertising and negatively impact our business. For example, some French courts have interpreted French trademark laws in ways that would limit the ability of competitors to advertise in connection with generic keywords. Adoption of similar interpretations by Russian or other national courts may adversely affect our business. In addition, Russian law does not specifically regulate behavioral targeting in relation to advertising, which is a standard tool widely used in the online business. Any future interpretation of Russian law affecting the regulation of behavioral targeting could have a negative impact on our business.

        Furthermore, there is no clarity regarding the approach Russian law and court practice will take with respect to the use of third parties' trademarks in keywords for the purposes of search and contextual advertising. There is a practice of courts recognizing that the use of trademarks in keywords should not be considered a breach of exclusive trademark rights and that the operator of the advertising platform allowing the use of keywords for ad targeting should not be held liable for such use. However, inconsistent decisions among different courts and in different regions are not uncommon in Russia. Therefore, our operations might be adversely affected depending upon the approach the Russian courts take in this respect.

Intellectual Property Regulation

        Part IV of the Civil Code of Russia (as amended), which came into force in 2008, is the major body of Russian law providing the legal framework for intellectual property regulation, including with respect to the acquisition, maintenance, protection and enforcement of exclusive rights. Additionally, Russia acceded to the World Trade Organization in 2012 and also become a party to the 1994 WTO TRIPS Agreement governing the principal aspects of the intellectual property protection afforded to the parties thereto.

        In principle, the acquisition, protection and enforcement of intellectual property rights in Russia are addressed in line with international standards. In particular, literary, artistic and scientific works are subject to copyright protection without any registration and enjoy legal protection simply by virtue of being created in an objective form perceivable by third parties. Although the registration of software and databases with the Federal Service for Intellectual Property ("Rospatent") is possible, the procedure is voluntary and is not commonly performed. We take the approach that registration with Rospatent of the software and databases we develop is excessive since we believe that we are

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adequately protected by the existing legal framework as the holder of all copyrights and related rights to our software and databases.

        Mandatory registration with Rospatent is required for "hard IP" such as trademarks and patents (available in Russia for inventions, utility models and industrial designs) in order for the rights holder to acquire exclusive rights. Trademarks registered abroad under the Madrid Agreement Concerning the International Registration of Trademarks dated April 14, 1891 and/or the Protocol to the Agreement, dated June 27, 1989, have the same legal protection in Russia as locally registered trademarks. Our main brand and branding materials for our key services have trademark protection in the jurisdictions where we operate, either through national trademarks or international registrations; however, until recently we did not register figurative logos that we use on our websites on the basis that they are changed and upgraded from time to time and we also hold copyrights in these logos. We are currently intensifying our efforts to obtain broader trademark protection.

        Under Russian law, we have exclusive rights to trade secrets (know-how) only if we have complied with a legal requirement to introduce reasonable measures to maintain confidentiality of our trade secrets, which measures may be burdensome and formalistic to implement. As we rely extensively in our operations on the protection afforded to trade secrets, we have implemented a set of measures required by the Federal Law No. 98-FZ of July 29, 2004 "On Commercial Secrecy" in order to protect these trade secrets (know-how). However, there is a risk that our measures will be deemed insufficient and, as a result, we will fail to acquire rights to these trade secrets under Russian law.

        One of the known problems and risks in Russian business practice relates to acquiring exclusive rights to works for hire and patentable results from employees as well as third-party contractors. By operation of Russian law, the exclusive rights to works for hire and patentable results are assigned to the employer if the intellectual property is created by an employee during the course of the ordinary job duties (or, in the case of patents, pursuant to a specific request by the employer). A similar rule is applicable in the context of agreements specifically providing for the creation of software. Uncertainties and disputes might arise with respect to whether exclusive rights have actually been transferred to the employer or contractor on the basis of an employment or other agreement if intellectual property has been created outside the scope of the employee or contractor's employment (in the case of works for hire), or a legal entity has failed to properly document its relations with its own employees and subcontractors and, as a result, is unable to transfer any rights to its customer. In case of employment disputes, Russian courts of common jurisdiction (as opposed to arbitrazh commercial state courts) may be more inclined to follow an overly formalistic approach and may take a pro-employee position in the event of uncertainty in a dispute of this nature.

        Nonetheless, under Russian law, subject to the risks outlined above, we are deemed to have acquired copyrights and rights to file patent applications with respect to works for hire and patentable results created by our employees during the course of their employment with us and within the scope of their job duties, and have the exclusive rights to their further use and disposal subject to compliance with the requirements of the Civil Code of Russia.

Liability of Online Service Providers

        Laws relating to the liability of online service providers for the activities of their users and other third parties are still being developed in Russia and certain other countries in which we operate. In 2013, new amendments to Russian laws, including to the Russian Civil Code, came into effect aimed at the enhancement of intellectual property rights enforcement on the internet.

        The amendments of the Part IV of the Civil Code of the Russian Federation introduced provisions aimed at establishing a framework for limitation of liability of online service providers. In particular, the law currently contains a rule that service providers transmitting information in communication networks will not be held liable in the event the provider has neither initiated transmission nor selected

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recipients and performs no modification of the transmitted material. A hosting provider, on the other hand, may be exempt from liability in the event it possesses no actual or constructive knowledge of the infringement and timely undertakes necessary and sufficient measures to cease infringement following receipt of written notification identifying the rights holder and the location of the allegedly infringing material. Although adoption of these provisions may be a step forward in terms of clarifying the limitations of online service provider liability, substantial ambiguity still remains, particularly because these provisions contain no guidance as to what would constitute "necessary and sufficient measures" in this regard (for example, whether they include a requirement to monitor re-uploading of the same work by the same or other users) and provide no clarity on the limitation of liability with respect to other types of online service providers (such as those performing caching or providing information location tools). In light of this, our exposure to liability will significantly depend on interpretation of these new provisions by the courts and officials.

        The Russian Civil also imposes strict liability for infringement of intellectual property rights if such infringement is committed in connection with business activities. It is unclear how these provisions apply to online service providers.

        This legislation, as well any similar additional regulations, may impose new requirements on us and our operations and lead to material legal liability, which can be difficult to foresee or limit. See "Risk Factors—We may be held liable for information or content displayed on, retrieved by or linked to our websites and mobile applications, or distributed by our users, or we may be required to block certain content, or access to our websites can be restricted, which could harm our reputation and business."

Regulation of Electronic Payments

        Federal Law No.161-FZ "On the National Payment System" provides a legal definition of the term "electronic money" (or "digital money"). Under these regulations, payments with digital money fall into the sphere of banking activities and such payments are regarded as a special transaction entered into without the need to open an account. Such transactions, however, have to be performed by a credit organization supervised by the Central Bank of Russia. To comply with this law, our Yandex.Money joint venture established a new, non-banking credit organization subsidiary, which obtained the required license from the Central Bank of Russia. All necessary contractual obligations of PS Yandex.Money LLC have been transferred to its non-banking credit organization subsidiary.

Mass Media Regulation

        Dissemination of news and similar information to a wide audience in Russia is regulated by the Russian Federation Law No. 2124-1 "On Mass Media" (as amended) (the "Mass Media Law"). This law requires certain parties that disseminate news and similar mass communications and information to be registered with the appropriate Russian governmental body, Roscomnadzor, and to comply with restrictions regarding the content of the information they distribute. The Mass Media Law currently permits electronic network publications (websites) to register as mass media. As registration under this amendment is voluntary, we elected not to register our online properties as mass media. See "Risk Factors—The legal framework governing internet services and e-commerce in Russia and the other countries in which we operate is in the process of development, and we may be required to have additional licenses, permits or registrations, or to take additional actions in order to conduct our business, which may be costly or may limit our flexibility to run our business."

        Russian law also regulates popular bloggers. The legislation is drafted in general terms and can potentially apply to any owner of a website or webpage which contains publicly available information and is visited by more than 3,000 internet users daily, whether such site is owned and/or operated by an individual or a legal entity. Popular bloggers are required to register with the Russian authorities and bear responsibilities in respect of the content available on their websites or webpages which are

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substantially similar to the obligations of mass media in Russia (including a requirement to ensure the accuracy of the information made available). Since the scope of this legislation is uncertain, it is unclear whether it applies to any of the companies of our group.

        Amendments to the Mass Media Law that came into force on January 1, 2016 impose a limit on non-Russian ownership and control, direct or indirect, of Russian mass media of no more than 20%. Accordingly, if our core business were to be required to register as a mass media, it would have a material impact on the ownership structure of our business and could materially adversely affect the value of our Class A shares. See also "Risk Factors—If the Russian government were to impose limitations on foreign ownership of internet businesses in Russia, it could materially adversely affect our group and the value of our Class A shares."

Encryption Activity License

        The licensing of encryption activity is governed by Federal Law No. 99-FZ "On Licensing of Specific Types of Activities". Under the law, a variety of activities related to encryption require a special permit (license) granted by the Federal Security Service (the "FSS") subject to the applicant's continued compliance with a number of licensing requirements, including the requirement to use only certified encryption means and equipment and to ensure timely extension of such certification when its terms expires.

        Our Yandex.Money joint venture with Sberbank, uses encryption algorithms for the protection of transfers performed by its customers and may be required to obtain licenses for their use. The requirements for the grant and maintenance of licenses for the use of encryption algorithms are very broad and unclear, leaving the regulator with much discretion in applying and enforcing the applicable laws. See also "Risk Factors—The legal framework governing internet services and e commerce in Russia and other countries in which we operate is evolving, and we may be required to obtain additional licenses, permits or registrations, or to take additional actions in order to conduct our business, which may be costly or may limit our flexibility to run our business."

Strategic Companies Law

        In accordance with the Strategic Companies Law, there are restrictions with respect to the acquisition of voting shares or participation interests and establishment of control by foreign legal entities and individuals, as well as states, international organizations and entities controlled by them, with respect to business entities with strategic importance. The internet and online advertising are not currently industries specifically covered by the Strategic Companies Law, but there have previously been draft amendments under consideration by the Russian State Duma, which, if adopted, would include certain internet companies that have large audiences within the scope of this law. In addition, entities holding licenses to use encryption technologies are covered by this law. As discussed above, Yandex.Money joint venture holds encryption licenses and is thus subject to the Strategic Companies Law.

        Under the provisions of the Strategic Companies Law, the direct or indirect acquisition in excess of 25% of the voting power of a strategically important entity by a foreign state, foreign governmental organization, international organization or entity controlled by a foreign government or international organization, or the acquisition of shares representing in excess of 50% of the voting power of such a company by any other foreign investor or any of its affiliated companies, requires the prior approval of a Russian Government Committee chaired by the Prime Minister. In addition, foreign investors or their group of companies that are controlled by a foreign state or a foreign government or international organization are prohibited from owning shares representing more than 50% of voting power of a strategically important company, including jointly with other unrelated foreign investors controlled by a foreign state or international organization.

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        Moreover, the acquisition of 5% or more of the shares of a strategically important company triggers a requirement to submit a notification to the FAS. Failure to obtain the required governmental approval prior to an acquisition would render the acquisition invalid. The Strategic Companies Law also applies to entirely foreign transactions entered into by foreign entities abroad (in other words, the law applies on the basis of the effects of such transactions in Russia). In the event invalidation of the transaction is not possible in the specific circumstances the court is entitled to deprive the foreign investor of its voting rights with respect to the acquired shares or participation interest.

Privacy and Personal Data Protection Regulation

        We are subject to Russian and foreign laws regarding privacy and the protection of our users' personal data. We publish on our websites our privacy policies and practices concerning the use, processing, storage and disclosure of user data. Any failure by us to comply with our privacy policies as well as Russian or other applicable laws and regulations relating to privacy and the protection of user data may result in proceedings against us by governmental authorities, individuals or other third parties, which may adversely impact our business. In addition, the adoption and interpretation of data protection laws, and their application to internet operations, are often difficult to predict, unclear and are in a constant state of development and although we believe that we comply with all current requirements, these laws could in the future be interpreted and applied in a manner that is inconsistent with current practice. For instance, in May 2014 the Court of Justice of the European Union established that an operator of a search engine can be obligated to remove from the list of search results links to web-pages containing inaccurate or outdated information related to an individual. Russian personal data laws have been amended, granting a similar right to Russian citizens, who from January 2016 have been able to apply for the removal of search results that link to inaccurate or irrelevant information about them.

        Russian data protection laws provide that an individual must freely consent to the production of her/his personal data. Such consent must be concrete, informed and conscious, and may be provided in any form evidencing the fact that consent has been provided, unless otherwise established by federal law, which requires that it be made in writing, signed by digital electronic signature or evidenced in a similar manner prescribed by laws and regulations.

        We, like our peers, seek this consent from our users by asking them to click on a button or select a check-box in appropriate circumstances prior to commencement of the account registration process indicating the user's consent to our collection, use, storage and processing of personal data. Furthermore, most of our services do not require the creation of an account prior to their use and we collect only limited information in these circumstances. In particular, we place cookies and use other wide-spread technologies that assist us in improving user experience of our products and services and ultimately benefit both our users and advertisers to the extent that we use a certain part of this collected information for behavioral targeting of advertising. No clear legislative guidelines have been provided addressing whether our practices are compliant with the requirements of the data protection legislation in Russia and abroad. There is a risk that such laws may be interpreted and applied in a manner that is not consistent with our current data protection practices. Complying with various regulations in this area may cause us to incur additional costs or to change our business practices. Further, any failure by us to protect our users' privacy and data may result in a decrease of user confidence in our services, and may ultimately result in a loss of users, which would adversely affect our business.

        In 2014, the Russian government adopted legislation to regulate the "organizers of information distribution". Organizers of information distribution must retain a broad range of data relating to and generated by the users (including the facts of receipt, transfer, delivery and processing of information as well as information about the users) for a period of six months and provide such data to security and investigation authorities at their request. If an organizer of information distribution fails to comply

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with the above requirements, the Russian authorities can prescribe the blocking of access to the services of such organizer of information distribution.

        Russian personal data law also now requires that companies store all personal data of Russian users only in databases located inside Russia. Although our principal data centers are currently located in Russia, this law could limit our flexibility in managing our operations globally.

Licenses for the Provision of Communication Services

        Pursuant to the Federal Law No. 126-FZ "On Communication" (as amended), entities that provide certain telecommunication services for a fee are required to obtain a "telematics" license from the Roscomnadzor. We generally do not charge a fee for the online services we provide to our users and therefore, we believe that we are not required to hold a telematics license. We do, however, generate revenue from ads directed to our users. As a result, it is possible that a Russian court or government agency may construe our advertising revenue as a fee and determine that we are required to hold a telematics license, which would require us to apply for and comply with the terms of any such license.

        Additionally, we may in the future offer user services for a fee, which could require us to comply with the licensing requirements described above.

Protection of Minors from Harmful Information

        The Federal Law No. 436-FZ "On Protection of Minors from the Information Harmful to their Health and Development" (the "Minors Protection Law") restricts the circulation of certain identified categories of publicly available and distributed information that may be harmful for minors. In particular, there is a requirement to take administrative and technical measures to prevent dissemination of restricted information. In addition, the circulation of information products designated for specific age categories of minors must be accompanied by a relevant mark identifying the age restriction category of information. Advertising of information products must also be accompanied by a category identification mark. Age category identification for information made available on the internet (except for the websites registered as mass media) is voluntary.

        Furthermore, administrators of websites registered as mass media have been expressly relieved from the responsibility for age category identification with respect to commentaries and messages posted by users of the websites at their discretion.

Restriction of Access to Websites Containing Illegal Information

        Federal Law No. 149-FZ "On Information, Information Technologies and Protection of Information" (as amended) establishes a system for the blocking of websites on the internet that make available specific categories of illegal information related to child pornography, encouraging suicide or drug use as well as other restricted information. A uniform register of domain names, website page locators and network addresses maintained by Roscomnadzor enables identification of websites on the internet. After the inclusion of a specific website or webpage in the registry at the decision of the relevant state authority (in the event of child pornography, information related to suicides and drug use) or on the basis of a court ruling (any other restricted information), Roscomnadzor notifies the website hosting provider within 24 hours, which must, in turn, within 24 hours notify the administrator of the website in question. If following notification the website administrator fails to take down the information, the hosting provider must restrict the access to such information. Provided that the information is still accessible within 3 days after notice is given to the hosting provider, Roscomnadzor will include the IP address of the website in the registry, which must be blocked by all Russian internet service providers and telecommunication service operators.

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        The legal framework related to this blacklist of websites is controversial, and the procedures established by this law have been heavily criticized by the general public, industry players and legal scholars, and may well be revised. Roscomnadzor issued a clarification on November 30, 2012 specifying that search engines, news aggregators and cached information used in the course of their operation will not be included in the registry because they fall outside the scope of the law. At the same time, the regulator's approach may change and our operations could be adversely affected by inappropriate application of the websites blacklist legislation.

        Further legislation is currently in place in Russia and utilized by authorities that allows blocking of websites that contain extremist information (including containing calls for mass rioting, extremist activity and participation in mass assemblies conducted in violation of established procedure) at the request of certain governmental authorities without prior notification. Only a subsequent post-blocking notification to the relevant website owner or hosting provider is required.

        The categories of illegal information to which access can be restricted may be interpreted broadly or be expanded. For example, in July 2014 Russian authorities ordered that access to several websites be blocked on the basis of the violation of personal data regulations. The most recent amendment to this legislation, which came into force on May 1, 2015, permits the permanent blocking of websites for violation of copyright and related rights. There is no clarity as to how this measure will be applied in practice. Based on these considerations and the uncertainties in the application of these laws, we may be subject to arbitrary blocking measures, injunctions or court decisions that may require us to block or remove content, which may adversely affect our services and operations. See "Risk Factors—We may be held liable for information or content displayed on, retrieved by or linked to our websites and mobile applications, or distributed by our users, or we may be required to block certain content, or access to our websites can be restricted, which could harm our reputation and business."

Securities Regulation

        The Federal Law No. 39-FZ "On the Securities Market" (as amended) (the "Securities Law"), contains the principal regulations governing the placement and circulation of foreign securities and financial instruments in Russia.

        Our Class A ordinary shares are currently listed on the NASDAQ Global Select Market and in June 2014 were admitted to trading on Moscow Exchange; therefore we are now required to comply with specific Russian regulation concerning information disclosure, insider trading and certain other requirements as may be applied to foreign issuers in Russia.

Antimonopoly Regulation

        The Federal Law No. 135-FZ "On Protection of Competition" (as amended) grants to the FAS as the antimonopoly regulator wide powers and authorities to maintain competition in the market, including approval or monitoring of mergers and acquisitions, establishment of rules of conduct for market players occupying dominant positions, prosecution of any wrongful abuse of a dominant position, and the prevention of cartels and other anti-competitive agreements or practices. The regulator may impose significant administrative fines (up to 15% of the annual revenue derived in the market where the violation occurred) on market players that abuse their dominant position or otherwise restrict competition, and is entitled to challenge contracts, agreements or transactions that are in violation of the antimonopoly regulation. We have a substantial market share in the online advertising market, however, we are not recognized by the regulator as occupying a dominant position in any market. However, we understand that the regulator from time to time focuses on internet services and could in the future recognize online advertising as a separate market, and could identify dominant players and impose conduct limitations and other restrictions.

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        In February 2015, we made a formal request to FAS to open an investigation into whether Google is using its dominant position to promote its search and other services bundled into a single package imposed for pre-installation by device manufacturers, as well as employing exclusive dealing and other restrictive practices to increase its search market share. The FAS has conducted an investigation based on our request and in September 2015 concluded that Google had breached Russian antitrust laws. FAS instructed Google to refrain from anti-competitive behavior and to take action to restore competition. In December 2015 Google appealed FAS's decision to the Arbitrazh Court of Moscow. In March 2016 the appeal was dismissed but the possibility of a further appeal remains.

Taxation Regulation

        Taxation of legal entities and individuals in Russia is regulated primarily by the Tax Code of the Russian Federation. The scope and application of the Tax Code is elaborated by numerous regulations and clarifications from the Ministry of Finance of Russia and by the Federal Tax Service, which enforces the tax laws. Russian tax law and procedures are still not sufficiently developed and local divisions of the Federal Tax Service have considerable autonomy in tax law interpretation and often interpret tax rules inconsistently. Also, there is extensive court practice on the construction of the Code's provisions, which can sometimes be unpredictable or even contradictory. Both the substantive provisions of the Russian tax law and the interpretation and application of those provisions by the Russian tax authorities and by Russian courts may be subject to rapid and unpredictable change. See "Risk Factors—Changes in the Russian tax system or unpredictable or unforeseen application of existing rules may materially adversely affect our business, financial condition and results of operations."

Applicability of Other Regulations

        Because our services are accessible to Russian-language speakers worldwide and are becoming increasingly available to other users globally, certain foreign jurisdictions, including those in which we have not established a local office, employees or infrastructure, may require us to comply with their local laws.

Item 4A.    Unresolved Staff Comments.

        None.

Item 5.    Operating and Financial Review and Prospects.

        You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the "Selected Consolidated Financial Information" section of this Annual Report and our consolidated financial statements and related notes appearing elsewhere in this Annual Report. In addition to historical information, this discussion contains forward-looking statements based on our current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the "Risk Factors" and "Forward-Looking Statements" sections and elsewhere in this Annual Report.

Overview

        We are one of the largest European internet companies and the leading search provider in Russia. Our principal constituencies are:

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        Our yandex.ru website first began generating revenue in 1998. We became profitable in 2003 and have been profitable every year since then.

        Advertising revenues accounted for 98.3%, 98.8% and 97.4% of our total revenues in 2013, 2014 and 2015, respectively. Our advertising revenues consist of fees charged to advertisers for serving text-based and display ads on our websites and those of our partners in the Yandex ad network. Most of our revenues are generated from text-based advertising, with a smaller portion generated from display advertising. We place the significant majority of our text-based ads through Yandex.Direct and the remainder through Yandex.Market, our e-commerce gateway service. We sell approximately half of our text-based ads on a prepaid basis. Our Yandex.Direct advertisers pay us on a cost-per-click (CPC) basis, which means that we recognize revenue only when a user clicks on one of our advertisers' ads. Our display advertising is generally sold on a cost-per-thousand (CPM) impressions basis. An "impression" is a single instance of sending an ad for display on a web browser or other connected internet application. For these ads, we recognize as revenue the fees charged to advertisers when their ads are displayed. Our Yandex.Market service is priced on a CPC basis, like Yandex.Direct, and also offers cost-per-action, or CPA advertising, introduced in November 2013, which recognizes revenue from these ads only when the desired action has occurred.

        We recognize our advertising revenues net of value added tax (currently 18.0% in Russia) and sales commissions and bonuses. Although the major part of our revenues is generated by direct sales to our advertisers, a significant portion of our advertising sales are sold through media agencies. We recognize revenues from those advertising sales net of the commissions and bonuses paid to these agencies.

        We benefit from a large and diverse base of advertisers. We had 558,000 advertisers in 2014 and 680,000 in 2015. Our advertisers include individuals and small, medium and large enterprises across Russia and the other countries in which we operate, as well as large multinational corporations. No individual advertiser accounted for more than 1.2% of our total revenues in 2013, 2014 or 2015. On a geographical basis, we generated more than 93% of our total revenues in 2013 and more than 91% of our total revenues in each of 2014 and 2015, from advertisers and other customers with billing addresses in Russia, including the Russian offices of large multinational advertisers.

        We serve ads both on our own websites and on the websites of our partners in the Yandex ad network. For text-based ads served on the websites of our partners in the Yandex ad network, we recognize as revenue the fees paid to us by advertisers each time a user clicks on one of their text-based ads or, for those advertisers paying for display ads on a CPM basis, as their ads are displayed. We pay our partners in the Yandex ad network fees for serving our advertisers' ads on their websites. These fees are primarily based on revenue-sharing arrangements. As such, the fees paid to our partners in the Yandex ad network are calculated as a percentage of the revenues we earn by serving ads on partners' websites. We account for the fees we pay to our partners in the Yandex ad network as traffic acquisition costs, a component of cost of revenues. Since we launched our Yandex ad

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network in 2006, these costs annually have, in aggregate, amounted to more than one-half of the revenues we have earned from serving ads on the Yandex ad network and we expect them to continue to do so in the foreseeable future. Yandex ad network partners do not pay us any fees associated with our serving ads on their websites.

        Our agreements with our partners in the Yandex ad network generally have an indefinite term but may be terminated by either party at will with no termination fees. Agreements with larger partners in the Yandex ad network are individually negotiated and vary in duration but typically renew automatically. Our agreement with Mail.ru, for which we began providing paid search in July 2013, is subject to mutual, material early termination penalties under specified circumstances. In 2013, 2014, and 2015, none of our ad network partners accounted for more than 10% of our total revenues. In 2015, Mail.ru continued to be our most significant ad network partner.

        We believe the most significant factors that influence our ability to continue to increase our advertising revenues include the following:

Segments

        Prior to 2014, we operated as a single operating segment. During 2014-2015, we revised our organizational structure, separating several focus areas into product lines and geographies. As a result, our businesses are organized in following operating segments:

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Key Trends Impacting Our Results of Operations

        Our results of operations are being impacted by the current macroeconomic environment in Russia. This environment is negatively affecting our rate of revenue growth and our operating margins. The depreciation of the Russian ruble has increased our U.S. dollar-denominated expenses, including the rent on our Moscow headquarters and the acquisition of servers and networking equipment, and has generally increased the rate of inflation in Russia. In addition to the impact of the current macroeconomic environment, the trends described below are key drivers of our results of operations.

        Our business and revenues have grown rapidly since inception, and the effectiveness of text-based advertising as a medium has contributed to the rapid growth of our business. Advertising spending continues to shift from offline to online as the internet evolves and we expect that our business will continue to grow. However, we expect that our revenue growth rate will continue to decline over time as a result of a number of factors, including challenges in maintaining our growth rate as our revenues increase to higher levels, increasing competition, changes in the nature of queries, the evolution of the overall online advertising market and the declining rate of growth in internet users in Russia as overall internet penetration increases.

        Our operating margins, representing our income from operations as a percentage of revenues, may fluctuate in the future depending on the percentage of our advertising revenues that we derive from the Yandex ad network compared with our own websites. The operating margin we realize on revenues generated from the websites of our partners in the Yandex ad network is significantly lower than the operating margin generated from our own websites. This lower operating margin arises because of the cost of revenues we incur given that we pay to our partners, on average, more than one-half of the advertising fees we earn from serving ads on Yandex ad network websites. The percentage of our advertising revenues derived from the Yandex ad network increased from 20.8% in 2013 to 23.7% in 2014 and to 26.0% in 2015 and contributed to the overall decline in our operating margin. We currently expect that the portion of our advertising revenues derived from the Yandex ad network will remain stable in 2016. The principal contributor of our Yandex ad network revenues is our agreement to power paid search on Mail.ru, which began in July 2013. Furthermore, the margin we earn, on average, on revenue generated from the Yandex ad network could decrease in the future if we are required to share with our partners a greater percentage of the advertising fees generated through their websites.

        Growth in mobile search may also have an impact on our operating margins. The number of search queries from mobile telephones, including both smartphones and feature phones, and tablet devices is growing more quickly than desktop queries. Queries from mobile phones and tablet devices still, however, represented only 25% of our total search queries and 21% of text-based advertising revenues for the year ended December 31, 2015. To date, growth in mobile usage has not had a material impact on our pricing, revenues or operating margins; however, we have seen some evidence that this growth may exert modest downward pressure on our operating margins in the future.

        In February 2016, we signed a definitive agreement pursuant to which we will become the sole owner of a newly-created company that will hold title to the office complex in central Moscow that houses our Russian headquarters. See "Item 10: Additional Information—Material Contracts". The closing of the transaction remains subject to certain conditions, including completion of the reorganization of the ownership structure of the complex and required regulatory approvals, and is anticipated to occur in the second half of 2016. Since as of the date of publication we are unable to predict the exact timing of the transaction closing, we are not including the potential effect of this transaction to the forward-looking statements made below in this section and elsewhere in this Annual

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Report. Below we provide a summary of the anticipated material consequences of the proposed transaction on our results of operations:

        Recent and future capital expenditures may also put pressure on our operating margins. Our capital expenditures increased from RUB 4,936 million in 2013 to RUB 9,679 million in 2014, and RUB 13,045 million in 2015. We spent approximately 84% of our total capital expenditures in 2015 on servers and data center expansion to support growth in our current operations. Our depreciation and amortization expense declined as a percentage of revenues from 9.4% in 2013 to 8.8% in 2014, before increasing to 13.0% in 2015. We currently expect our capital expenditures in 2016 to decrease as a percentage of revenues in comparison to 2015, as in 2016 we expect a lower increase of server capacities compared to 2015. The more significant investment in 2015 was primarily aimed at the increase in our search index size with the goal of further enhancing the general quality of our search and growing our search share. As our capital expenditures are to a significant extent denominated in U.S. dollars and euro, any further depreciation of the Russian ruble is likely to result in an increase in capital expenditures and depreciation and amortization both in absolute terms and as a percentage of revenues.

        To support further brand enhancement and respond to competitive pressures, we spent larger amounts in 2014 and 2015 on advertising and marketing than we have spent historically, both in absolute terms and as a percentage of revenue. A significant portion of our advertising and marketing expense in 2014 and 2015 relates to our efforts to build our brand and expand market share in Turkey, as well as to promote our Yandex.Market and Yandex Browser and to support our brand in Russia and the other markets in which we operate. We expect to continue to invest significantly in advertising and marketing. We currently expect our advertising and marketing costs in 2016 to increase as a percentage of revenues in comparison to 2015 due to investment into promotion of Yandex Browser, mobile Search, Yandex.Market, Yandex.Taxi and Auto.ru. This spending could negatively impact our operating margin if it does not drive revenue growth in the manner that we anticipate.

        In Turkey we offer a variety of services and apps for both desktop and mobile platforms localized for that market, including search, mail, maps, traffic, weather and browser. Our search share in Turkey reached 6.6% of desktop search market in January 2016, according to comScore qSearch. As general macro-economic conditions have worsened globally and this has been especially pronounced across emerging markets, we have reduced our spending in Turkey on distribution and advertising and

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marketing fronts. As we remain committed to our Turkish users and plan to maintain our market share by continuing to deliver high quality search and navigation products, we will continue to incur costs to tailor our site to address the preferences and needs of users in Turkey. In addition, in certain countries we may choose to pursue joint venture arrangements as a means of developing our local offerings. Such arrangements may entail additional financial commitments and risks.

        Our revenues are impacted by seasonal fluctuations in internet usage and seasonality in advertising expenditures. Internet usage and advertising expenditures generally slow down during the months when there are extended Russian public holidays and vacations, and are significantly higher in the fourth quarter of each year. Moreover, expenditures by advertisers tend to be cyclical, reflecting overall economic conditions, retail patterns and advertising budgeting and buying patterns.

        Inflation in Russia has also impacted our results of operations and may continue to do so. According to the Russian Federal State Statistics Service, Rosstat, the consumer price index in Russia increased by 6.5%, 11.4% and 12.9% in 2013, 2014, and 2015, respectively. The increase in the annual rate of inflation in 2014 and 2015 reflected the depreciation of the Russian ruble. We can provide no assurance that the annual rate of inflation will not appreciate further in 2016. Higher rates of inflation may accelerate increases in our operating expenses and capital expenditures and reduce the value and purchasing power of our ruble-denominated assets, such as cash, cash equivalents and term deposits.

        Changes in the value of the U.S. dollar compared with the Russian ruble can also negatively affect our results of operations. See "Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency Exchange Risk."

Recent Acquisitions

        In October 2013, we completed the acquisition of a 100% ownership interest in KinoPoisk LLC and its subsidiary, the operator of the largest and most comprehensive Russian-language website dedicated to movies, television programs and celebrities. In connection with this acquisition, we paid cash consideration of $80.0 million in full upon the closing of the deal, including $3.0 million paid into an escrow account, which has now been released to the sellers. A further description of the acquisition and its accounting implications can be found in Note 4 of our audited consolidated financial statements included elsewhere in this Annual Report.

        In March 2014, we completed the acquisition of a 100% ownership interest in KitLocate Ltd., the developer of an energy-efficient geolocation technology for mobile devices, for cash consideration of up to $10.2 million, including $4.0 million paid in full upon closing of the deal, up to $2.3 million of earn-out payments on the achievement of certain distribution milestones, and $3.9 million paid to an escrow account, the release of which was subject to KitLocate's founders continued employment. The Company recorded the milestones related earn-out payments at the fair value of $1.5 million as part of purchase consideration. The Company has not recorded the contingent payments related to the continued employment as purchase price consideration but instead recorded them as compensation expense as the former KitLocate's shareholders completed their requisite service periods. The Company fully settled its obligations by paying $1.9 million for milestones related earn-out payments and releasing the escrowed amount in full in July 2015.

        In August 2014, we completed the acquisition of the Auto.ru group ("Auto.ru"), one of the leading online auto classifieds businesses in Russia, for cash consideration of $178.4 million paid in full upon

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closing of the deal, including $14.0 million paid into an escrow account of which half has been released to the sellers in February 2016. The remaining amount in escrow will be paid to the sellers on the date falling 43 months after the completion date, assuming no warranty claims.

        In September 2014, we bought the assets and assumed the liabilities of ADFOX LLC ("ADFOX"), which operates an advertising technology platform that provides services for planning, managing and analyzing advertising campaigns on the internet. We paid cash consideration of $11.3 million, including $8.5 million paid upon closing of the deal and $1.4 million paid on the first anniversary of the closing in the fourth quarter of 2015. The amount of $1.4 million will be paid on the second anniversary of the closing assuming no warranty claims.

        During the year ended December 31, 2014, we completed other acquisitions and purchases of intangible assets for total consideration of approximately RUB 347 million.

        In January 2015, we bought the assets and assumed the liabilities of the RosTaxi ("RosTaxi") business, which operates a taxi fleet management application. The agreement stipulates for a cash consideration of up to RUB 500 million, including a deferred payment of up to RUB 380 million, subject to successful technical integration and client base transition, and contingent consideration of up to RUB 500 million payable in our ordinary shares on the third anniversary of the closing, depending on the number of qualifying taxi trips.

        In December 2015, we completed the acquisition of assets and assumption of liabilities of Agnitum Ltd ("Agnitum"), an antivirus protection developer, for a cash consideration of RUB 120 million and a deferred payment of up to RUB 80 million including additional payments subject to the attainment of certain implementation and integration milestones of up to RUB 60 million payable in cash and up to RUB 20 million to be granted in restricted share units.

        A further description of the acquisitions and their accounting implications can be found in Note 4 of our audited consolidated financial statements included elsewhere in this Annual Report.

        In February 2016, we signed a definitive agreement with Krasnaya Roza 1875 Limited, a Cypriot company ("KR1875"), pursuant to which we will issue 12,900,000 new Class A ordinary shares to KR1875 in exchange for a 100% interest in a newly-created company ("NewCo") that will hold title to the office complex in central Moscow that houses our Russian headquarters, with around 80,000 square-meters of Class A and B office space. We will also assume approximately $490 million of the NewCo's debt. The debt is denominated in U.S. dollars, bears interest at LIBOR + 6.2% and matures in 2024. KR1875 has agreed to enter into a lock-up agreement in respect of the shares it will receive for a period of 90 days from closing. The closing of the transaction remains subject to customary conditions, including completion of the legal reorganization of the ownership structure of the complex and required regulatory approvals, and is anticipated to occur in the second half of 2016.

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Recent Dispositions

        In July 2013, we completed the sale of a 75% (less one ruble) interest in Yandex.Money to Sberbank for $59.1 million in cash. Concurrent with the sale of our interest in Yandex.Money, we formed a joint venture with Sberbank in respect of this business, which continues under the Yandex.Money brand. As a result of this sale, we deconsolidated Yandex.Money and no longer show its online payment commissions as revenue. Since July 2013, we have accounted for Yandex.Money using the equity method, and, therefore, record our share of the results of operations of the joint venture within the other income, net line in our consolidated statements of income.

Results of Operations

        The following table presents our historical consolidated results of operations as a percentage of revenues for the periods indicated:

 
  Year ended December 31,  
 
  2013   2014   2015  

Revenues

    100.0 %   100.0 %   100.0 %

Operating costs and expenses:

                   

Cost of revenues

    26.8     28.2     28.1  

Product development

    14.8     17.5     22.5  

Sales, general and administrative

    16.5     15.3     19.4  

Depreciation and amortization

    9.4     8.8     13.0  

Goodwill impairment

    0.0     0.0     1.0  

Total operating costs and expenses

    67.5     69.8     84.0  

Income from operations

    32.5     30.2     16.0  

Interest income

    4.3     1.7     2.9  

Other income, net

    5.5     12.4     3.8  

Income before income taxes

    42.3     44.3     22.7  

Provision for income taxes

    8.2     10.8     6.5  

Net income

    34.1 %   33.5 %   16.2 %

        Our consolidated operating margin has decreased from 32.5% in 2013 to 30.2% in 2014 and 16.0% in 2015. The decrease in 2014 compared with 2013 was primarily due to increases in traffic acquisition costs paid to our partners in the Yandex ad network each year as a percentage of our total revenues and to increases in rent expenses attributable to additional office space we began leasing in Moscow in May 2014 and to the fact that rent for our Moscow headquarters is U.S. dollar-denominated. The decrease in 2015 compared with 2014 was primarily due to increases in depreciation and amortization as a percentage of our total revenues reflecting investments in servers and data centers made in 2014 and 2015, and to increases in our rent expenses attributable to further appreciation of the U.S. dollar in 2015 compared to 2014, as well as to salary increases we implemented in early 2015.

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        The following table presents our historical results of operations by reportable segment for the periods indicated:

 
  Year ended December 31,  
 
  2013   2014   2015  
 
  (in millions of RUB)
 

Revenues

                   

Search and Portal

    37,039     47,920     55,905  

E-commerce

    2,810     2,889     3,400  

Classifieds

    327     539     894  

Taxi

    112     327     984  

Experiments

    179     337     441  

Eliminations

    (965 )   (1,245 )   (1,832 )

Total revenues

    39,502     50,767     59,792  

Operating costs and expenses

                   

Search and Portal

    24,289     31,435     40,706  

E-commerce

    807     1,053     1,776  

Classifieds

    114     277     764  

Taxi

    56     110     848  

Experiments

    1,418     2,327     3,850  

Eliminations

    (965 )   (1,245 )   (1,832 )

Total operating costs and expenses

    25,719     33,957     46,112  

Adjusted operating income

                   

Search and Portal

    12,750     16,485     15,199  

E-commerce

    2,003     1,836     1,624  

Classifieds

    213     262     130  

Taxi

    56     217     136  

Experiments

    (1,239 )   (1,990 )   (3,409 )

Eliminations

             

Total adjusted operating income

    13,783     16,810     13,680  

        Eliminations represent the elimination of transaction results between the reportable segments, primarily related to advertising. Operating costs and expenses of reportable segments exclude share-based compensation expense, goodwill impairment, amortization of acquisition-related intangible assets and compensation expense related to contingent consideration.

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        The following table presents our consolidated revenues, by source, in absolute terms and as a percentage of total revenues for the periods presented:

 
  Year ended December 31,  
 
  2013   2014   2015  
 
  RUB   % of Revenues   RUB   % of Revenues   RUB   % of Revenues  
 
  (in millions of RUB, except percentages)
 

Advertising revenues(1):

                                     

Text-based advertising:

                                     

Yandex websites

    27,584     69.8 %   35,228     69.4 %   40,243     67.3 %

Yandex ad network websites

    7,885     20.0     11,410     22.5     14,506     24.3  

Total text-based advertising

    35,469     89.8     46,638     91.9     54,749     91.6  

Display advertising:

                                     

Yandex websites

    3,185     8.1     3,034     6.0     2,856     4.8  

Yandex ad network websites

    194     0.4     475     0.9     605     1.0  

Total display advertising

    3,379     8.5     3,509     6.9     3,461     5.8  

Total advertising revenues

    38,848     98.3     50,147     98.8     58,210     97.4  

Online payment commissions(2)

    394     1.0                  

Other revenues

    260     0.7     620     1.2     1,582     2.6  

Total revenues

    39,502     100.0 %   50,767     100.0 %   59,792     100.0 %

(1)
We record revenue net of VAT, commissions, bonuses and discounts. Because it is impractical to track commissions, bonuses and discounts for advertising revenues generated on our own websites and on those of our partners in the Yandex ad network separately, we have allocated commissions, bonuses and discounts between our own websites and those of our partners in the Yandex ad network proportionally to their respective revenue contributions.

(2)
In connection with our sale of a 75% (less one ruble) interest in Yandex.Money to Sberbank, we ceased recording online payment commissions as revenues as of July 2013 and now account for Yandex.Money using the equity method. See "Recent Dispositions."

        Advertising revenues.    Total advertising revenues increased by RUB 8,063 million, or 16.1%, from 2014 to 2015 and by RUB 11,299 million, or 29.1%, from 2013 to 2014. Advertising revenue growth over the periods under review resulted primarily from growth in sales of text-based ads, driven by an increase in the number of paid clicks and fluctuations in average cost-per-click paid by our advertisers. As a result of the current macroeconomic environment in Russia, we do not expect the rate of advertising revenue growth in 2016 to be higher than in 2015.

        Paid clicks on our own websites together with those of our Yandex ad network partners increased 12% from 2014 to 2015 and 29% from 2013 to 2014. The average cost-per-click on our own websites together with those of our partners in the Yandex ad network increased 5% from 2014 to 2015 and 2% from 2013 to 2014.

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        During the periods under review, the year-over-year rates of change in paid clicks and average cost-per-click on a quarterly basis were as follows:

Quarter
  Year-over-year
growth in paid
clicks, %
  Year-over-year
growth in
cost-per-click, %
 

First Quarter 2013

    18     14  

Second Quarter 2013

    29     5  

Third Quarter 2013

    50     (5 )

Fourth Quarter 2013

    52     (7 )

First Quarter 2014

    49     (5 )

Second Quarter 2014

    36     2  

Third Quarter 2014

    19     8  

Fourth Quarter 2014

    18     3  

First Quarter 2015

    12     2  

Second Quarter 2015

    12     1  

Third Quarter 2015

    15     3  

Fourth Quarter 2015

    10     12  

        The rate of change in paid clicks and average cost-per-click, and their correlation with the rate of increase in our revenues, may fluctuate from period to period based on such factors as seasonality, advertiser competition for keywords, our ability to launch enhanced advertising products that seek to deliver increasingly targeted ads, the fees advertisers are willing to pay based on how they manage their advertising costs, and general economic conditions.

        Display advertising revenues.    Display advertising revenues accounted for approximately 5.8% of total revenues in 2015, compared with 6.9% in 2014 and 8.5% in 2013. According to AKAR, the display advertising market in Russia decreased 2% in 2015 compared with 2014, while text-based advertising market continued to grow. These differently directed trends in display and text-based advertising market development led our display advertising revenues to decrease as a percentage of our total revenues in 2015. We expect display advertising revenues to be impacted more significantly than text-based ad revenues by the current economic environment as advertisers tend to prefer more easily measured text-based advertising.

        Online payment commissions.    Online payment commissions accounted for 1.0% of total revenues in 2013 and nil in 2014 and 2015, reflecting our sale of a 75% (less one ruble) interest in Yandex.Money to Sberbank in July 2013, following which we no longer record Yandex.Money's online payment commissions as revenue. We concurrently formed a joint venture with Sberbank with respect to the Yandex.Money business and now account for Yandex.Money using the equity method of accounting.

        Other revenues.    Other revenues principally represent commissions for providing information services related to our Yandex.Taxi service and sublease revenues. Other revenues more than doubled in each of the periods under review due to the development of paid non-advertising services such as our Yandex.Taxi service.

        Revenues by reportable segment.    Our revenues attributable to the Search and Portal segment increased by RUB 7,985 million, or 16.7%, from 2014 to 2015 and by RUB 10,881 million, or 29.4%, from 2013 to 2014. The growth in this segment's revenues is in line with the growth in our overall advertising revenues. Search and Portal revenues accounted for approximately 93.5% of total revenues in 2015, compared with 94.4% in 2014 and 93.8% in 2013.

        Our revenues attributable to the E-commerce segment increased by RUB 511 million, or 17.7%, from 2014 to 2015 and by RUB 79 million, or 2.8%, from 2013 to 2014. E-commerce revenues

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accounted for approximately 5.7% of total revenues in 2015 and 2014, compared with 7.1% in 2013. The decrease of this segment's share in total revenues in 2015 and 2014 compared with 2013 is primarily due to impact of the macroeconomic environment in Russia following the significant depreciation of the Russian ruble and increased competition in the industry.

        Our revenues attributable to the Classifieds segment increased by RUB 355 million, or 65.9%, from 2014 to 2015 and by RUB 212 million, or 64.8%, from 2013 to 2014. Classifieds revenues accounted for approximately 1.5% of total revenues in 2015, compared with 1.1% in 2014 and 0.8% in 2013. The increase of this segment's share in total revenues in 2015 compared with 2014 is primarily due to effect of revenues from Auto.ru, which was acquired in August 2014.

        Our revenues attributable to the Taxi segment increased by RUB 657 million, or 200.9%, from 2014 to 2015 and by RUB 215 million, or 192.0%, from 2013 to 2014. Taxi revenues accounted for approximately 1.6% of total revenues in 2015, compared with 0.6% in 2014 and 0.3% in 2013. The increase of this segment's share in total revenues in 2015 compared with 2014 is primarily due to organic growth in the business and effect of revenues from RosTaxi, which was acquired in January 2015.

        Our revenues attributable to the Experiments category increased by RUB 104 million, or 30.9%, from 2014 to 2015 and by RUB 158 million, or 88.3%, from 2013 to 2014. Experiments revenues were primarily related to Media Services and remained flat at approximately 0.7% of total revenues in 2014 and 2015, compared with 0.5% in 2013.

        Our operating costs and expenses consist of cost of revenues; product development expenses; sales, general and administrative expenses; depreciation and amortization expense; and goodwill impairment. In addition to the reasons discussed below with respect to each category, we generally expect our total operating costs and expenses to increase in absolute terms and as a percentage of revenues in the near term; see "—Key Trends Impacting Our Results of Operations".

        Cost of revenues.    Cost of revenues consists primarily of traffic acquisition costs. Traffic acquisition costs are the amounts paid to our partners in the Yandex ad network for serving our text-based and display ads on their websites and to our partners who distribute our products or otherwise direct search queries to our websites. These amounts are primarily based on revenue-sharing arrangements. Some of our distribution partners are compensated on the basis of the number of Yandex browser toolbars or search bars installed.

        The agreements with our distribution partners provide for payment of fees to them on a non-refundable basis following the period in which the distribution fees are earned. We do not have a standard term or termination provision that applies to agreements with our distribution partners. Our largest distribution partner since 2012, Opera, accounted in aggregate for 24% of our distribution costs in 2014 and 2015, and 28% in 2013. The Opera agreement also provides for a 12-month "revenue tail" period should that agreement be terminated.

        Cost of revenues also includes the expenses associated with the operation of our data centers, including related personnel costs, rent, utilities and telecommunications bandwidth costs, as well as content acquisition costs.

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        The following table presents the primary components of our cost of revenues in absolute terms and as a percentage of revenues for the periods presented:

 
  Year ended December 31,  
 
  2013   2014   2015  
 
  (in millions of RUB,
except percentages)

 

Traffic acquisition costs:

                   

Traffic acquisition costs related to the Yandex ad network

    5,377     7,520     8,981  

Traffic acquisition costs related to distribution partners

    2,473     3,556     3,760  

Total traffic acquisition costs

    7,850     11,076     12,741  

as a percentage of revenues

    19.9 %   21.8 %   21.3 %

Other cost of revenues

    2,756     3,260     4,069  

as a percentage of revenues

    7.0 %   6.4 %   6.8 %

Total cost of revenues

    10,606     14,336     16,810  

as a percentage of revenues

    26.8 %   28.2 %   28.1 %

        Cost of revenues increased by RUB 2,474 million, or 17.3%, from 2014 to 2015, primarily due to a RUB 1,665 million increase in traffic acquisition costs, and by RUB 3,730 million, or 35.2%, from 2013 to 2014, primarily due to an increase of RUB 3,226 million in traffic acquisition costs. The majority of our traffic acquisition costs relate to the Yandex ad network, with a smaller portion relating to distribution relationships. Traffic acquisition costs relating to the Yandex ad network, both for our text-based and our display advertising, increased by RUB 1,461 million from 2014 to 2015 and by RUB 2,143 million from 2013 to 2014, representing our Yandex ad network partners' share in an increased amount of Yandex ad network revenue for the period, with the principal driver of the increase in 2014 being our agreement to power paid search on Mail.ru starting from July 1, 2013. In addition, the amounts paid to our distribution partners increased by RUB 204 million from 2014 to 2015 and by RUB 1,083 million from 2013 to 2014 due to growth in our existing distribution relationships, as well as the addition of new distribution partners. As a percentage of total revenues, traffic acquisition costs increased from 19.9% in 2013 to 21.8% in 2014 and slightly decreased to 21.3% in 2015, as a result of change in the partner mix. While total traffic acquisition costs increased, network partner traffic acquisition costs as a percentage of network partner revenues decreased to 59.4% in 2015 compared with 63.3% in 2014 and 66.6% in 2013, and distribution traffic acquisition costs as a percentage of text-based revenues from our own sites slightly decreased compared with 2014, and made 9% of text-based revenue in 2015 compared to 10% in 2014, and 9% in 2013.

        Other cost of revenues increased by RUB 809 million, or 24.8%, from 2014 to 2015, primarily due to an increase of RUB 301 million in content acquisition and costs for outsourced services, RUB 252 million of rent and utilities costs related mainly to our Moscow premises, and RUB 189 million in personnel costs other than share-based compensation expense and RUB 67 million in additional share-based compensation expense.

        In 2014, other cost of revenues increased by RUB 504 million compared to 2013, primarily due to an increase of RUB 227 million in personnel costs other than share-based compensation expense, RUB 254 million in content acquisition and costs for outsourced services, RUB 119 million of rent and utilities costs related mainly to our Moscow premises and RUB 40 million in additional share-based compensation expense. The increases in 2014 were partly offset by the absence of the cost of online payment commissions and other cost of revenues related to Yandex.Money of RUB 136 million starting from July 2013.

        The slower increase in personnel costs from 2014 to 2015 compared to prior years is primarily a result of a decrease in our headcount that is allocated to cost of revenues, which increased from 387 as

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of December 31, 2013 to 461 as of December 31, 2014, and then decreased to 418 as of December 31, 2015.

        We anticipate that cost of revenues will continue to increase in absolute terms primarily as a result of increases in traffic acquisition, content and data center costs, but will remain flat as a percentage of revenues in the near term, excluding the effect of Red Rose acquisition as described below. The primary drivers of increases in our future traffic acquisition costs are the increase of revenues derived from the websites of our partners in the Yandex ad network, as well as the extent to which we use distribution partners to direct search queries to our website, partly offset by the change in the mix of Yandex ad network partners to partners with more favorable terms. In addition, our traffic acquisition costs as a percentage of advertising revenues may fluctuate in the future based on whether we are successful in negotiating more Yandex ad network and distribution arrangements that provide for lower revenue-sharing obligations or, alternatively, in less favorable revenue-sharing arrangements as result of increased competition for these arrangements with existing and potential new partners.

        Product development.    Product development expenses consist primarily of personnel costs incurred for the development, enhancement and maintenance of our search engine and other Yandex services and technology platforms. We also include rent and utilities attributable to office space occupied by development staff in product development expenses. We expense product development costs as they are incurred.

        The following table presents our product development expenses in absolute terms and as a percentage of revenues for the periods presented:

 
  Year ended December 31,  
 
  2013   2014   2015  
 
  (in millions of RUB,
except percentages)

 

Product development expenses

    5,827     8,842     13,421  

as a percentage of revenues

    14.8 %   17.5 %   22.5 %

        Product development expenses increased by RUB 4,579 million, or 51.8%, from 2014 to 2015, and by RUB 3,015 million, or 51.7%, from 2013 to 2014. These increases were primarily due to increases in salaries in 2014 and 2015, as well as increases in office rental costs for our Moscow headquarters, which are U.S. dollar denominated. Development personnel headcount increased from 2,924 as of December 31, 2013 to 3,329 as of December 31, 2014, and decreased to 3,286 as of December 31, 2015. As a percentage of revenues, product development expenses increased from 2014 to 2015 as well as from 2013 to 2014.

        We anticipate that product development expenses will increase in absolute terms but will not change materially as a percentage of revenues in 2016, excluding the effect of Red Rose acquisition as described below.

        Sales, general and administrative.    Sales, general and administrative expenses consist of compensation and office rent expenses for personnel engaged in customer service, sales, sales support, finance, human resources, facilities, information technology and legal functions; fees for professional services; and advertising and marketing expenditures.

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        The following table presents our sales, general and administrative expenses in absolute terms and as a percentage of revenues for the periods presented:

 
  Year ended December 31,  
 
  2013   2014   2015  
 
  (in millions of RUB,
except percentages)

 

Sales, general and administrative expenses

    6,537     7,782     11,601  

as a percentage of revenues

    16.5 %   15.3 %   19.4 %

        Sales, general and administrative expenses increased by RUB 3,819 million, or 49.1%, from 2014 to 2015 and by RUB 1,245 million, or 19.0%, from 2013 to 2014. The increase in 2015 compared to 2014 was primarily due to increases in advertising and marketing expenses, mainly in Russia and Turkey, by RUB 997 million. In addition, increased depreciation of the Russian ruble resulted in corresponding increases in allocable office rent and utilities of RUB 633 million in 2015 compared to 2014 and of RUB 340 million in 2014 compared to 2013. Personnel expenses grew RUB 546 million in 2015 compared to 2014 and RUB 547 million in 2014 compared to 2013. The slight deceleration in personnel expenses growth in the later period resulted from a decrease in sales, general and administrative headcount from 1,826 as of December 31, 2014 to 1,759 as of December 31, 2015, compared to 1,591 as of December 31, 2013.

        Additional factors contributing to the overall increase from 2014 to 2015 were RUB 381 million of certain one-off allowances we provided for in 2015, an increase of RUB 361 million in share-based compensation expense, RUB 340 million in professional services, RUB 155 million in other outsourced services, RUB 101 million in bank commission expenses related to Yandex.Money and other payment systems, and RUB 107 million in provision for doubtful accounts.

        Additional factors contributing to the overall increase from 2013 to 2014 were RUB 132 million in bank commission expenses as we started to record commissions for online payments processing by Yandex.Money in July 2013, RUB 105 million in business travel expenses partially driven by the geographical expansion of our business, RUB 71 million in share-based compensation expense, and RUB 53 million in recruiting and training expenses.

        We anticipate that our sales, general and administrative expenses will continue to increase in absolute terms and as a percentage of revenues in 2016 excluding the effect of Red Rose acquisition as described below, as we continue to invest into promotion of our products and services. These increases will relate primarily to increased advertising and marketing expenses.

        Depreciation and amortization.    Depreciation and amortization expense relates to the depreciation of our property and equipment, mainly servers and networking equipment, leasehold improvements, data center equipment and office furniture, and the amortization of our intangible assets with definite lives.

        The following table presents our depreciation and amortization expense in absolute terms and as a percentage of revenues for the periods presented:

 
  Year ended December 31,  
 
  2013   2014   2015  
 
  (in millions of RUB,
except percentages)

 

Depreciation and amortization expense

    3,695     4,484     7,791  

as a percentage of revenues

    9.4 %   8.8 %   13.0 %

        Depreciation and amortization expense increased by RUB 3,307 million, or 73.8%, from 2014 to 2015 and by RUB 789 million, or 21.4%, from 2013 to 2014. The increases in absolute terms for 2015

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as compared to 2014 and for 2014 as compared to 2013 were primarily due to RUB 2,506 million and RUB 313 million increases, respectively, in depreciation expense related to server and network equipment and infrastructure systems, RUB 330 million and RUB 310 million increases, respectively, in amortization expense related to technologies and licenses not related to business acquisitions, RUB 167 million and RUB 16 million increases, respectively, in depreciation expense related to buildings, and RUB 48 million in both years in depreciation expense related to office furniture and equipment. In 2015 compared to 2014, the increase in absolute terms was also attributable to a RUB 260 million increase in amortization expense related to acquisition-related intangible assets. The increases in depreciation and amortization expense for these categories were the result of capital expenditures in 2013, 2014 and 2015, material depreciation of the Russian ruble as our capital expenditures are mostly U.S. dollar denominated and the acquisitions of new businesses, including KinoPoisk in October 2013, Auto.ru in August 2014 and RosTaxi in January 2015.

        We anticipate that depreciation and amortization expense will increase in absolute terms and as a percentage of revenues in the near term as we continue to invest in our technology infrastructure and in business acquisitions. Further depreciation of the Russian ruble may also result in a material increase in our capital expenditures and respective depreciation and amortization.

        Share-based compensation.    In our consolidated statements of income, share-based compensation expense is recorded in the same functional area as the expense for the recipient's cash compensation. As a result, share-based compensation expense is allocated among our cost of revenues, product development expenses and sales, general and administrative expenses.

        The following table presents our aggregate share-based compensation expense in absolute terms and as a percentage of revenues for the periods presented:

 
  Year ended December 31,  
 
  2013   2014   2015  
 
  (in millions of RUB,
except percentages)

 

Share-based compensation expense

    754     1,210     2,718  

Share-based compensation expense as a percentage of revenues

    1.9 %   2.4 %   4.5 %

        Share-based compensation expense increased by RUB 1,508 million, or 124.6%, from 2014 to 2015, because of new equity-based awards granted in 2014 and 2015 and material depreciation of the Russian ruble, as share-based compensation expense is denominated in U.S. dollars. The share-based compensation expense for 2015 includes RUB 192 million related to Business Unit Equity Awards as described in the note 14 to our consolidated financial statements.

        Share-based compensation expense increased by RUB 456 million, or 60.5%, from 2013 to 2014, primarily because of new equity-based awards granted in 2013 and 2014.

        We anticipate that share-based compensation expense will increase in absolute terms and as a percentage of revenues in the near term because of new equity-based awards and depreciation of the Russian ruble.

        Goodwill impairment.    The goodwill impairment recorded in 2015 of RUB 576 million relates to KinoPoisk and was a result of our annual goodwill impairment test. The impairment was a result of a combination of factors, including adverse changes in the business climate in Russia subsequent to the acquisition, higher than expected competition in the Russian online media services sector and the resulting decrease in the projected operating results.

        Operating costs and expenses by reportable segments.    Our operating costs and expenses attributable to the Search and Portal segment increased by RUB 9,271 million, or 29.5%, from 2014 to 2015 and by

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RUB 7,146 million, or 29.4%, from 2013 to 2014. These increases were primarily due to increases in depreciation and amortization expense and allocable office rent and utilities, as well as personnel expenses and traffic acquisition costs.

        Our operating costs and expenses attributable to the E-commerce segment increased by RUB 723 million, or 68.7%, from 2014 to 2015 and by RUB 246 million, or 30.5%, from 2013 to 2014. These increases were primarily due to increases in personnel expenses and advertising and marketing expenses.

        Our operating costs and expenses attributable to the Classifieds segment increased by RUB 487 million, or 175.8%, from 2014 to 2015 and by RUB 163 million, or 143.0%, from 2013 to 2014. These increases were primarily due to increases in personnel expenses and allocable office rent and utilities resulting from increases in salary over the periods as we continue to invest in the development of the service. With respect to 2015 compared to 2014, an additional factor contributing to the overall increase was an increase of RUB 193 million in advertising and marketing expenses.

        Our operating costs and expenses attributable to the Taxi segment increased by RUB 738 million, or 670.9%, from 2014 to 2015 and by RUB 54 million, or 96.4%, from 2013 to 2014. With respect to 2015 compared to 2014, the primary factor contributing to the overall increase was an increase of RUB 506 million in advertising and marketing expenses. These increases were also due to increases in personnel expenses and allocable office rent and utilities resulting from increases in salary over the periods as we continue to invest in the development of the service.

        Our operating costs and expenses attributable to the Experiments category increased by RUB 1,523 million, or 65.4%, from 2014 to 2015 and by RUB 909 million, or 64.1%, from 2013 to 2014. These increases were primarily due to increases in personnel expenses and allocable office rent and utilities resulting from increases in salary over the periods as we continue to invest in the development of the service, as well as depreciation and amortization expense. With respect to 2015 compared to 2014, an additional factor contributing to the overall increase was an increase of RUB 206 million in advertising and marketing expenses and RUB 381 of certain allowances recognized in 2015.

        Interest income, net consists of interest earned on our cash, cash equivalents, term deposits and investments in debt securities, partially offset by interest expense representing coupon and amortization of debt discount and issuance costs related to our convertible notes issued in December 2013. We derive a considerable portion of our interest income from ruble term deposits held in major Russian banks. Investments in term deposits, money market funds and debt securities held in the Netherlands generally yield considerably lower returns.

        Interest income, net increased from RUB 856 million in 2014 to RUB 1,744 million in 2015, principally as a result of investing more of our cash from operating activities in Russia, where our investments earn significantly higher returns comparing with the Netherlands, which was compensated partly by interest expense of RUB 1,293 million representing coupon and amortization of debt discount and issuance costs related to our convertible notes issued in December 2013.

        Interest income, net decreased from RUB 1,717 million in 2013 to RUB 856 million in 2014, as a result of recording interest expense of RUB 1,091 million representing coupon and amortization of debt discount and issuance costs related to our convertible notes.

        Our other income net primarily consists of foreign exchange gains and losses generally resulting from changes in the value of the U.S. dollar compared with the Russian ruble, and other non-operating

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gains and losses, including gains from the sale of equity securities/subsidiaries, gains from repurchases of convertible notes and gains and losses from investments in equity securities.

        The following table presents the components of our other income, net in absolute terms and as a percentage of revenues, for the periods presented:

 
  Year ended December 31,  
 
  2013   2014   2015  
 
  (in millions of RUB,
except percentages)

 

Foreign exchange gains

    139     6,553     1,903  

Gain from sale of equity securities/subsidiaries

    2,137          

Gain from repurchases of convertible debt

        548     310  

Impairment of investments in equity securities

        (700 )    

Other

    (117 )   (105 )   46  

Total other income, net

    2,159     6,296     2,259  

Total other income, net, as a percentage of revenues

    5.5 %   12.4 %   3.8 %

        Because the functional currency of our operating subsidiaries in Russia is the Russian ruble, changes in the ruble value of these subsidiaries' monetary assets and liabilities that are denominated in other currencies (primarily the U.S. dollar) due to exchange rate fluctuations are recognized as foreign exchange gains or losses in our income statement. In 2013 we recorded in our primary Russian subsidiary as other income, net a RUB 127 million gain. In 2014 and 2015, because of the material depreciation of the ruble, we recorded foreign exchange gain of RUB 6,518 million and RUB 1,835 million, respectively, arising from changes in the value of the U.S. dollar compared with the Russian ruble during the year. Although the U.S. dollar value of our U.S. dollar-denominated cash, cash equivalents and term deposits are not impacted by these currency fluctuations, they result in upward and downward re-valuations of the ruble equivalent of these U.S. dollar-denominated monetary assets.

        In 2013, gain from the sale of equity securities/subsidiaries primarily consisted of a RUB 2,035 million gain from our sale of a 75% (less one ruble) interest in Yandex.Money to Sberbank in July 2013. In 2014, we repurchased $150 million in principal amount of our outstanding convertible notes for $131.1 million resulting in a gain of RUB 548 million. Also in 2014, we recorded an impairment on our minority equity investment in Blekko Inc. of RUB 700 million. In 2015, we repurchased $119.4 million in principal amount of our outstanding convertible notes for $102.3 million resulting in a gain of RUB 310 million.

        Items recognized as "Other" in "Other income, net" include gains and losses from investments in equity securities, changes in the fair value of derivative instruments and other non-operating gains and losses.

        The following table presents our provision for income taxes and effective tax rate for the periods presented:

 
  Year ended December 31,  
 
  2013   2014   2015  
 
  (in millions of RUB,
except percentages)

 

Provision for income taxes

    3,239     5,455     3,917  

Effective tax rate

    19.4 %   24.3 %   28.8 %

        Our provision for income taxes decreased by RUB 1,538 million from 2014 to 2015 and increased by RUB 2,216 million from 2013 to 2014, primarily as a result of changes in taxable income.

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        Our effective tax rate increased by 4.5 percentage points from 2014 to 2015. Our effective tax rate was higher in 2015 than in 2014 primarily due to the effects of goodwill impairment, certain allowances recognized in 2015, as well as an increase in share-based compensation expense, all of which are non-deductible. Adjusted for the one-off effects and share-based compensation expense, our effective tax rate would have been 22.7% and 23.0% in 2015 and 2014, respectively.

        Our effective tax rate increased by 4.9 percentage points from 2013 to 2014. Our effective tax rate was higher in 2014 than in 2013 primarily because in the first quarter of 2014 we began to accrue for a 5% dividend withholding tax on the portion of the current year profit of our principal Russian operating subsidiary that we considered will not be permanently reinvested in Russia. Adjusted for this tax, our effective tax rate for 2014 would have been 22.2%.

        See "Critical Accounting Policies, Estimates and Assumptions—Tax Provisions" for additional information about our provision for income taxes.

        A reconciliation of our statutory income tax rate to our effective tax rate is set forth in note 10 of our audited consolidated financial statements included elsewhere in this Annual Report.

Quarterly Results of Operations

        The following tables present our unaudited quarterly results of operations in rubles and as a percentage of revenue for the eight consecutive quarters ended December 31, 2015. You should read the following tables together with our consolidated financial statements and related notes contained elsewhere in this Annual Report. We have prepared the unaudited quarterly information on the same basis as our audited consolidated financial statements. These tables include normal recurring adjustments that we consider necessary for a fair presentation of our results of operations for the quarters presented.

        Both seasonal fluctuations in internet usage and seasonality in advertising expenditures have affected, and are likely to continue to affect, our business. Internet usage and advertising expenditures generally slow down during the summer months, and increase significantly in the fourth quarter of each year. Moreover, expenditures by advertisers tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns.

        Because the functional currency of our operating subsidiaries in Russia is the Russian ruble, changes in the ruble value of these subsidiaries' monetary assets and liabilities that are denominated in other currencies (primarily the U.S. dollar) due to exchange rate fluctuations are recognized as foreign exchange gains or losses in our statements of income. As a result, our quarterly results of operations have been and will likely continue to be affected by the impact of foreign currency fluctuations on our reported results of operations, particularly changes in the value of the U.S. dollar as compared to the Russian ruble.

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        Our operating results for any quarter are not necessarily indicative of results for any future quarters or for a full year.

 
  Quarter ended  
 
  Mar 31,
2014
  Jun 30,
2014
  Sep 30,
2014
  Dec 31,
2014
  Mar 31,
2015
  Jun 30,
2015
  Sep 30,
2015
  Dec 31,
2015
 
 
  (in millions of RUB)
 

Consolidated statements of income data:

                                                 

Revenues

    10,885     12,158     13,057     14,667     12,339     13,920     15,439     18,094  

Operating costs and expenses:

                                                 

Cost of revenues(1)

    3,332     3,427     3,570     4,007     3,713     3,982     4,318     4,797  

Product development(1)

    2,004     2,079     2,086     2,673     3,347     3,300     3,168     3,606  

Sales, general and administrative(1)

    1,762     1,907     1,810     2,303     2,303     2,568     2,618     4,112  

Depreciation and amortization

    1,069     1,114     1,095     1,206     1,490     1,874     2,152     2,275  

Goodwill impairment

                                576  

Total operating costs and expenses

    8,167     8,527     8,561     10,189     10,853     11,724     12,256     15,366  

Income from operations

    2,718     3,631     4,496     4,478     1,486     2,196     3,183     2,728  

Interest income, net

    172     203     224     257     484     356     415     489  

Other (expense)/income, net

    668     (617 )   1,070     5,175     833     (1,787 )   2,076     1,137  

Income before income taxes

    3,558     3,217     5,790     9,910     2,803     765     5,674     4,354  

Provision for income taxes

    878     821     1,418     2,338     676     342     1,396     1,503  

Net income

    2,680     2,396     4,372     7,572     2,127     423     4,278     2,851  

(1)
These amounts exclude depreciation and amortization expense, which is presented separately, and include share-based compensation expense.

 
  Quarter ended  
 
  Mar 31,
2014
  Jun 30,
2014
  Sep 30,
2014
  Dec 31,
2014
  Mar 31,
2015
  Jun 30,
2015
  Sep 30,
2015
  Dec 31,
2015
 

As a percentage of revenues:

                                                 

Revenues

    100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %

Operating costs and expenses:

                                                 

Cost of revenues(1)

    30.6     28.2     27.3     27.3     30.1     28.6     28.0     26.5  

Product development(1)

    18.4     17.0     16.0     18.3     27.1     23.7     20.5     19.9  

Sales, general and administrative(1)

    16.2     15.7     13.9     15.7     18.7     18.4     17.0     22.7  

Depreciation and amortization

    9.8     9.2     8.4     8.2     12.1     13.5     13.9     12.6  

Goodwill impairment

    0.0     0.0     0.0     0.0     0.0     0.0     0.0     3.2  

Total operating costs and expenses

    75.0     70.1     65.6     69.5     88.0     84.2     79.4     84.9  

Income from operations

    25.0     29.9     34.4     30.5     12.0     15.8     20.6     15.1  

Interest income

    1.6     1.7     1.7     1.8     3.9     2.5     2.8     2.7  

Other (expense)/income, net

    6.1     (5.1 )   8.2     35.3     6.8     (12.8 )   13.4     6.3  

Income before income taxes

    32.7     26.5     44.3     67.6     22.7     5.5     36.8     24.1  

Provision for income taxes

    8.1     6.8     10.8     16.0     5.5     2.5     9.1     8.3  

Net income

    24.6 %   19.7 %   33.5 %   51.6 %   17.2 %   3.0 %   27.7 %   15.8 %

(1)
These amounts exclude depreciation and amortization expense, which is presented separately, and include share-based compensation expense.

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Liquidity and Capital Resources

        As of December 31, 2015, we had RUB 60,702 million ($832.9 million) in cash, cash equivalents, term deposits and short-term debt securities. Cash equivalents consist of bank deposits with original maturities of three months or less, current term deposits consist of bank deposits with original maturities of more than three months but no more than one year, and non-current term deposits are bank deposits with original maturities of more than one year. Our current investment policy permits us to hold up to 50% of our total cash, cash equivalents, term deposits and debt securities in U.S. dollars and, additionally, to accumulate U.S. dollars for repayment of our convertible debt in 2018. In order to achieve this split of our currency holdings, we currently convert a portion of the rubles received from operations, as well as from maturing deposits, into U.S. dollars. We maintain our U.S. dollar-denominated accounts principally in the Netherlands and in Russia. Our U.S. dollar-denominated holdings as of December 31, 2015 accounted for approximately 56.8% of our cash, cash equivalents, term deposits and debt securities.

        The net proceeds to us in December 2013 from the sale of our 1.125% convertible senior notes due December 15, 2018, were approximately $593.9 million; we also received net proceeds of $89.2 million related to the exercise of the underwriters' over-allotment option in January 2014. From time to time, we repurchase and retire outstanding notes. During 2014, we repurchased and retired an aggregate of $150.0 million principal amount of the outstanding notes for $131.3 million. During 2015, we repurchased and retired an aggregate of $119.4 million principal amount of the outstanding notes for $102.3 million.

        The notes are convertible into cash, our Class A shares or a combination of cash and Class A shares, at our election, under certain circumstances, based on an initial conversion rate of 19.44 Class A shares per $1,000 principal amount of notes (which represents an initial conversion price of approximately $51.45 per share), subject to adjustment on the occurrence of certain events. A further description of the accounting treatment related to the notes can be found in note 11 of our audited consolidated financial statements included elsewhere in this Annual Report. Those proceeds were received by our parent company, a Dutch holding company that generates no operating cash flow itself.

        Other than the proceeds from our convertible note offering, our principal source of liquidity has been cash flow generated from the operations of our Russian subsidiaries. Under current Russian legislation, there are no restrictions on our ability to distribute dividends from our Russian operating subsidiaries to our parent other than a requirement that dividends be limited to the cumulative net profits of our Russian operating subsidiaries, calculated in accordance with Russian accounting principles, which differs from the cumulative net profit calculated in accordance with U.S. GAAP primarily due to the treatment of accrued expenses (such as rent, sales agency commissions and bonuses, unused vacation and deferred tax) and differences arising from the capitalization and depreciation of property and equipment. In addition, these dividends cannot result in negative net assets at our Russian subsidiaries or render them insolvent. Pursuant to applicable Russian statutory rules, the amount that our principal Russian operating subsidiary would be permitted to pay as a dividend to our parent company as of December 31, 2015 was approximately RUB 61,565 million ($844.7 million).

        We are required to pay 5% withholding tax on all dividends paid from our Russian operating subsidiaries to our parent company. We did not provide for dividend withholding taxes on the unremitted earnings of our foreign subsidiaries in 2013 and earlier years because they were considered permanently reinvested outside of the Netherlands. Starting in 2014, we began to accrue for a 5% dividend withholding tax on the portion of the current year profit of our principal Russian operating subsidiary that is considered not to be permanently reinvested in Russia. As of December 31, 2015, the cumulative amount of unremitted earnings upon which dividend withholding taxes have not been provided is approximately RUB 44,451 million ($609.9 million). We estimate that the amount of the

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unrecognized deferred tax liability related to these earnings is approximately RUB 2,223 million ($30.5 million). See "Risk Factors—Taxes payable on dividends from our Russian operating subsidiaries to our parent company might not benefit from relief under the Netherlands-Russia tax treaty." We do not have any current plan to pay cash dividends on our shares in the near term.

        As of December 31, 2015, we had no outstanding indebtedness other than the convertible notes due 2018. We do not currently maintain any line of credit or other similar source of liquidity. We will assume approximately $490 million of debt at the closing of the office complex acquisition in the second half of 2016, part of which we intend to repay immediately following the closing. Accordingly, our cash, cash equivalents, term deposits and short-term debt securities balances will decrease significantly and our indebtedness will increase by the remaining part of the assumed debt. The debt is due in 2024 and bears an interest rate of LIBOR + 6.2%.

        In summary, our cash flows were:

 
  Year ended December 31,  
 
  2013   2014   2015  
 
  (in millions of RUB)
 

Net cash provided by operating activities

    14,705     15,546     19,576  

Net cash used in investing activities

    (710 )   (28,589 )   (11,676 )

Net cash provided by/(used in) financing activities

    11,461     (11,707 )   (6,023 )

Effect of exchange rate changes on cash

    513     9,001     4,716  

        Cash provided by operating activities.    Cash provided by operating activities consists of net income adjusted for certain non-cash items, including depreciation and amortization expense, amortization of debt discount and issuance costs, share-based compensation expense, deferred tax benefit/expense, foreign exchange gains and losses, gain from repurchases of convertible notes, impairment of investments in equity securities, goodwill impairment and the effect of changes in working capital.

        Cash provided by operating activities increased by RUB 4,030 million from 2014 to 2015. This increase was primarily due to an increase in net cash from operations before changes in working capital of RUB 1,970 million and an increase of RUB 2,060 million in cash provided by changes in working capital. Cash provided by working capital was RUB 329 million in 2015 and increased between the periods primarily due to significant decreases in prepaid expenses and other assets, principally arising from a decrease in interest receivable accrued.

        From 2013 to 2014, cash provided by operating activities increased by RUB 841 million, and was due to an increase of RUB 1,831 million in net cash receipts from operations before changes in working capital, partially offset by an investment in working capital of RUB 990.

        We believe that our existing cash, cash equivalents and cash generated from operations will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months. To the extent that our cash, cash equivalents and cash from operating activities are insufficient to fund our future activities, we may be required to raise additional funds through equity or debt financings, including bank credit arrangements. Additional financing may not be available on terms favorable to us or at all.

        Cash used in investing activities in 2015 decreased by RUB 16,913 million compared to 2014 as a result of decreases in investments into term deposits (net of repayments) of RUB 10,845 million and in cash paid for acquisitions of new businesses of RUB 5,962 million, an increase in proceeds from

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maturities of debt securities of RUB 2,851 million and the amount of cash placed in escrow of RUB 714 million primarily related to contingent compensation payable to the sellers of Auto.ru and KitLocate in 2014, which was partially compensated by increases in capital expenditures of RUB 3,366 million. Cash paid for acquisitions of businesses in 2015, net of cash acquired, primarily consists of cash paid for RosTaxi in January 2015 and for Agnitum in December 2015. Investments in debt securities consist of cash paid to purchase credit-linked notes.

        Cash used in investing activities in 2014 increased by RUB 27,879 million compared to 2013 as a result of increases of investments in term deposits (net of proceeds) of RUB 9,763 million, in capital expenditures of RUB 4,743 million and of investments in debt securities of RUB 2,546 million and cash placed in escrow of RUB 656 million related to contingent compensation payable to the sellers of Auto.ru and KitLocate, offset by decreases in proceeds from maturities of debt securities of RUB 4,394 million, in proceeds from the sale of non-marketable equity securities of RUB 1,903 million, and in the amount of cash paid for acquisitions of new businesses of RUB 3,922 million. Cash paid for acquisitions of businesses in 2014, net of cash acquired, primarily consists of cash paid for Auto.Ru in August 2014. Investments in debt securities consist of cash paid to purchase Russian corporate bonds and Russian government bonds.

        Our total capital expenditures were RUB 13,045 million in 2015 and RUB 9,679 million in 2014. Our capital expenditures have historically consisted primarily of the purchases of servers and networking equipment. We also incurred significant capital expenditures in 2014 and 2015 related to the construction of one of our larger data centers. To manage enhancements in our search technology, expected increases in internet traffic, advertising transactions and new services, and to support our overall business expansion, we will continue to invest in data center operations, technology, corporate facilities and information technology infrastructure in 2016 and thereafter. Moreover, we may spend a significant amount of cash on acquisitions and licensing transactions from time to time.

        For 2015, cash outflow from financing activities was RUB 6,023 million, reflecting RUB 6,096 million used to repurchase our outstanding convertible notes and RUB 124 million of payment for contingent consideration, partly offset by proceeds of RUB 168 million from share option exercises.

        For 2014, cash outflow from financing activities was RUB 11,707 million, reflecting RUB 8,423 million used to fund our open market share repurchase program and RUB 6,414 million to repurchase our outstanding convertible notes (partly offset by RUB 2,981 million of proceeds from the additional issuance of our outstanding convertible notes in January 2014), RUB 42 million used for the payment of convertible debt issuance costs along with proceeds of RUB 191 million from share option exercises.

Off-Balance Sheet Items

        We do not currently engage in off-balance sheet financing arrangements, and do not have any interest in entities referred to as variable interest entities, which include special purpose entities and other structured finance entities.

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Contractual Obligations

        The following table sets forth our contractual obligations as of December 31, 2015:

 
  Payments due by period  
 
  Total   Through
2016
  2017
through
2018
  2019
through
2020
  Thereafter  
 
  (in millions of RUB)
 

Long-term principal debt obligations

    30,654         30,654          

Interest payments

    1,035     345     690          

Long-term operating lease obligations

    27,142     4,912     10,018     10,419     1,793  

Data centers related purchase obligations

    553     499     54          

Other purchase obligations

    6,731     2,263     1,926     1,770     772  

Payments related to business acquisitions

    1,512     837     675          

Total contractual obligations

    67,627     8,856     44,017     12,189     2,565  

        The table above presents our long-term rent obligations for our office and data center facilities, contractual purchase obligations related to data center operations and facility build-outs, as well as other purchase obligations primarily related to fixed utilities fees, technology licenses and other services and obligations related to repayment of our convertible notes due 2018. For agreements denominated in U.S. dollars, the amounts shown in the table above are based on the U.S. dollar/Russian ruble exchange rate prevailing on December 31, 2015. All amounts shown include value added tax, where applicable. See "Item 10: Additional Information—Material Contracts" for a description of our planned acquisition of our Moscow headquarters complex.

Critical Accounting Policies, Estimates and Assumptions

        Our accounting policies affecting our financial condition and results of operations are more fully described in our consolidated financial statements for the years ended December 31, 2013, 2014 and 2015, included elsewhere in this Annual Report. The preparation of these consolidated financial statements requires us to make judgments in selecting appropriate assumptions for calculating financial estimates, which inherently contain some degree of uncertainty. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe our critical accounting policies that affect the more significant judgments and estimates used in the preparation of our consolidated financial statements are as follows:

        We estimate the fair value of share options and share appreciation rights (together, "Share-Based Awards") that are expected to vest using the Black-Scholes-Merton (BSM) pricing model and recognize the fair value ratably over the requisite service period using the straight-line method. We used the

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following assumptions in our option-pricing model when valuing Share- Based Awards for grants made in the years ended December 31, 2013 and 2014:

 
  Year ended December 31,  
 
  2013   2014  

Expected life of the awards (years)

    5.44 - 7.04     5.52 - 7.04  

Expected annual volatility

    49 %   38 %

Risk-free interest rate

    1.77 %   1.85 %

Expected dividend yield

         

        No share options or SARs grants were made for the year ended December 31, 2015.

        To determine the expected option term, we use the "simplified method" as allowed under the SEC's accounting guidance, which represents the weighted- average period during which our awards are expected to be outstanding.

        With respect to price volatility, for 2013 grants we used the historical volatility of our publicly reported share price, for 2014 grants we use the future volatility of our share prices implied by our convertible debt prices cross-checked with the historical volatility of our publicly reported share price.

        We base the risk-free interest rate on the U.S. Treasury yield curve in effect at the grant date.

        We did not declare any dividends with respect to 2013, 2014 or 2015 and do not have any plans to pay dividends in the near term. We therefore use an expected dividend yield of zero in our option pricing model for awards granted in the years ended December 31, 2013 and 2014.

        We determine the amount of share-based compensation expense based on awards that we ultimately expect to vest, taking into account estimated forfeitures. U.S. GAAP requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We calculate the forfeiture rate by reference to our historical employee turnover rate. If our actual forfeiture rate is materially different from the estimate, share-based compensation expense could be materially lower than what has been recorded.

        Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. FASB authoritative guidance on accounting for uncertainty in income taxes requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

        Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest. Our actual Russian taxes may be in excess of the estimated amount expensed to date and accrued as of December 31, 2015, due to ambiguities in, and the evolution of, Russian tax legislation, varying approaches by regional and local tax inspectors, and inconsistent rulings on technical matters at the judicial level. See "Risk Factors—Risks Related to Doing Business and Investing in Russia and the Other Countries in which We Operate—Changes in the Russian tax system or unpredictable or

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unforeseen application of existing rules may materially adversely affect our business, financial condition and result of operations."

        In addition, significant management judgment is required in determining whether deferred tax assets will be realized. A valuation allowance is recognized to reduce deferred tax assets to amounts that are more likely than not to ultimately be utilized based on our ability to generate sufficient future taxable income. If actual events differ from management's estimates, or to the extent that these estimates are adjusted in the future, any changes in the valuation allowance could materially impact our consolidated financial statements.

        The FASB authoritative guidance requires us to recognize the assets of businesses acquired and respective liabilities assumed based on their fair values. Our estimates of the fair value of the identified intangible assets of businesses acquired are based on our expectations of the future results of operations of such businesses. The fair value assigned to identifiable intangible assets acquired is supported by valuations that involve the use of a large number of estimates and assumptions provided by management.

        We assess the carrying value of goodwill arising from business combinations on an annual basis, or more frequently if events or changes in circumstances indicate that such carrying value may not be recoverable. Other than our annual review, factors we consider important that could trigger an impairment review include under-performance of our reporting units compared with our internal budgets or changes in projected results, changes in the manner of utilization of the asset, and negative market conditions or economic trends. We determine whether impairment has occurred by assigning goodwill to the reporting unit identified in accordance with the authoritative guidance, and comparing the carrying amount of the reporting unit to the fair value of the reporting unit. Therefore, our judgment as to the future prospects of our business has a significant impact on our results and financial condition. If these future prospects do not materialize as expected or there is a future adverse change in market conditions, we may be unable to recover the carrying amount of an asset, resulting in future impairment losses.

Recently Adopted Accounting Pronouncements

        Effective January 1, 2015, we adopted the FASB accounting standards update (ASU) on reporting discontinued operations and disclosures of disposals of components of an entity. This update changed the criteria for determining which disposals can be presented as discontinued operations and modified related disclosure requirements. Under the new guidance, a discontinued operation is defined as: (i) a disposal of a component or group of components that is disposed of or is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity's operations and financial results or (ii) an acquired business or nonprofit activity that is classified as held for sale on the date of acquisition. The standard states that a strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity. The adoption of these amendments did not have a material impact on our consolidated balance sheet or results of operations.

        Effective September 30, 2015, we early adopted an ASU on simplification of the accounting for measurement-period adjustments. The new guidance requires the cumulative impact of measurement period adjustments, including the impact on prior periods, to be recognized in the reporting period in which the adjustment is identified. The adoption of this ASU did not have a material impact on our consolidated balance sheet or results of operations. In 2015, we recorded measurement period adjustment to decrease goodwill in the amount of RUB 283 million and to increase intangible assets

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and deferred tax liabilities in the amount of RUB 352 million and RUB 69 million, respectively (note 4 to our consolidated financial statements).

        Effective December 31, 2015, we early adopted an ASU that requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the corresponding debt liability. The new standard was applied on a retrospective basis. The adoption of this ASU did not have a material impact on our consolidated balance sheet or results of operations. As of December 31, 2014, unamortized debt issuance cost was RUB 202 million, including RUB 48 million and RUB 154 million recorded in prepaid expenses and long-term prepaid expenses in the consolidated balance sheets, accordingly.

        Effective December 31, 2015, we early adopted an ASU that requires that deferred tax liabilities and assets be classified as noncurrent on a company's balance sheet and applied it on a retrospective basis. The adoption of this ASU did not have a material impact on our consolidated balance sheet or results of operations. As of December 31, 2014 previously reported current deferred tax assets were RUB 180 million and current deferred tax liabilities were RUB 5 million.

Quantitative and Qualitative Disclosures about Market Risk

        The functional currency of our Russian operating subsidiaries, which account for the significant majority of our operations, is the Russian ruble. Therefore, our reported results of operations are impacted by fluctuations in exchange rates to the extent that we recognize foreign exchange gains and losses on monetary assets and liabilities denominated in currencies other than the ruble, primarily the U.S. dollar. Total U.S. dollar denominated cash, cash equivalents, term deposits and short-term debt securities held in Russia amounted to RUB 23,711 million and RUB 15,523 million as of December 31, 2015 and 2014, respectively. If the U.S. dollar had been stronger/weaker by 15% relative to the value of the Russian ruble as of December 31, we would have recognized additional foreign exchange gains/losses before tax of RUB 1,819 million and RUB 2,226 million in 2015 and 2014, respectively.

        Furthermore, the revenues and expenses of our Russian operating subsidiaries are primarily denominated in Russian rubles. However, as is customary in the Russian real estate market, the majority of our rent expenses, currently including the lease for our Moscow headquarters, is denominated in U.S. dollars. Additionally, a major portion of our capital expenditures, primarily servers, networking and engineering equipment imported by Russian suppliers, can also be materially affected by changes in the dollar-ruble and euro-ruble exchange rate. In the event of a material appreciation of the U.S. dollar against the ruble, such as that which occurred in 2014 and 2015, the ruble equivalents of these U.S. dollar-denominated expenditures increase and negatively impact our net income and cash flows.

        The lease of our Moscow headquarters currently entails outstanding commitments of approximately RUB 25,797 million as of December 31, 2015. The rent under these leases is denominated in U.S. dollars, but payable in rubles at the then-current exchange rate quoted by the Central Bank of Russia. The leases protect the landlord against depreciation of the U.S. dollar against the ruble, although we are not protected from any potential appreciation. The landlord's protection from U.S. dollar depreciation represents an embedded derivative that must be bifurcated and accounted for separately under U.S. GAAP. At the end of each period, we re-measure the fair value of this embedded derivative and record any change in fair value as foreign exchange gains or losses in the statements of income. We estimate the fair value of this derivative instrument using a model that is sensitive to changes in the U.S. dollar to Russian ruble exchange rate. If the U.S. dollar had been weaker by 15% relative to the value of the Russian ruble as of December 31, 2015, we would have recognized additional foreign exchange losses before tax of RUB 8 million in 2015. If the U.S. dollar

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had been stronger by 15% relative to the value of the Russian ruble as of December 31, 2015, we would have recognized additional foreign