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

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As filed with the Securities and Exchange Commission on May 9, 2011.

Registration no. 333-173766

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

Amendment No. 1
to

Form F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

YANDEX N.V.
(Exact Name of Registrant as Specified in Its Charter)

N/A
(Translation of Registrant's Name into English)

 
   
   
The Netherlands
(State or Other Jurisdiction of
Incorporation or Organization)
  7370
(Primary Standard Industrial
Classification Code Number)
  Not applicable
(I.R.S. Employer
Identification Number)

Laan Copes van Cattenburch 52
The Hague, the Netherlands, 2585 GB; Tel: +31-70-3454700
(Address, Including ZIP Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)

Yandex Inc.
299 S. California Ave, Suite 200
Palo Alto, CA 94306, USA; Tel: 1-650-838-0880
(Name, Address, Including ZIP Code, and Telephone Number,
Including Area Code, of Agent for Service)

 
   
Copies to:
Trisha Johnson, Esq.
Timothy J. Corbett, Esq.
WilmerHale
10 Noble Street
London EC2V 7QJ
United Kingdom
+44 20 7645 2400
  Nigel D. J. Wilson, Esq.
Davis Polk & Wardwell LLP
99 Gresham Street
London EC2V 7NG
United Kingdom
+44 20 7418 1300

Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.

          If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

          If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

          If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

          If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

CALCULATION OF REGISTRATION FEE

               
 
Title of Each Class of Securities
To Be Registered

  Amount to be Registered(1)
  Proposed Maximum Offering Price Per Share(2)
  Proposed Maximum Aggregate Offering Price(2)
  Amount of Registration Fee(3)
 

Class A shares, par value €0.01 per share

  57,391,493 shares   $22.00   $1,262,612,846   $146,590

 

(1)
Includes 5,217,405 Class A shares that may be purchased by the underwriters to cover over-allotments, if any. Includes Class A shares initially offered and sold outside the United States in reliance on Regulation S under the Securities Act of 1933 that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public; these Class A shares are not being registered for the purpose of sales outside the United States.

(2)
Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.

(3)
Calculated pursuant to Rule 457(a) based on an estimate of the proposed maximum aggregate offering price. A registration fee of $116,100 has been paid previously in connection with this registration statement based on an estimate of the proposed maximum aggregate offering price. Accordingly, the Registrant has paid the difference of $30,490 with this filing.

          The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


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The information in this preliminary prospectus is not complete and may be changed. We and the selling shareholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell these securities and we and the selling shareholders are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

PROSPECTUS (Subject to Completion)

Issued May 9, 2011

52,174,088 Class A Ordinary Shares

GRAPHIC

This is an initial public offering of Class A ordinary shares of Yandex N.V., or Yandex. We are offering 15,400,000 Class A shares, and the selling shareholders named in this prospectus are offering 36,774,088 Class A shares. We will not receive any of the proceeds from sales of Class A shares by the selling shareholders. No public market currently exists for our Class A shares. We expect the offer price to be between $20.00 and $22.00 per Class A share.



We have three classes of ordinary shares: Class A shares, Class B shares and Class C shares. Each Class A share is entitled to one vote per share. Each Class B share is entitled to ten votes per share and is convertible at any time into one Class A share and one Class C share. Our Class C shares are issued only to facilitate the conversion of our Class B shares into Class A shares under Dutch law and, for the limited period of time during which they are outstanding, will be voted by the foundation that holds these shares in the same proportion as the votes by holders of our Class A and Class B shares, so as not to influence the outcome of any vote. We anticipate that, upon the closing of this offering, our Class A shares and Class B shares will represent 6.3% and 93.7%, respectively, of the voting power of our outstanding shares.



We have applied for listing of our Class A shares on the NASDAQ Global Market under the symbol "YNDX."



Investing in our Class A shares involves a high degree of risk.
See "Risk Factors" beginning on page 9.



Price $              Per Share



 
  Price to
Public
  Underwriting
Discounts and
Commissions
  Proceeds
to Us
  Proceeds to
Selling
Shareholders
 

Per Class A Share

  $   $   $   $  

Total

  $   $   $   $  

We and the selling shareholders have granted the underwriters the right to purchase up to 5,217,405 additional Class A shares to cover over-allotments.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters have agreed to reimburse us for a portion of our expenses in connection with the offering. See "Underwriting."

The underwriters expect to deliver the Class A shares to purchasers on                                         , 2011.

MORGAN STANLEY   DEUTSCHE BANK SECURITIES   GOLDMAN, SACHS & CO.

PIPER JAFFRAY   PACIFIC CREST SECURITIES

                                        , 2011


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        You should rely only on the information contained in this prospectus or any free-writing prospectus we may authorize to be delivered or made available to you. We, the selling shareholders and the underwriters have not authorized anyone to provide you with additional or different information. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the selling shareholders are offering to sell, and seeking offers to buy, our Class A shares only in jurisdictions where offers and sales are permitted. The information in this prospectus or any free-writing prospectus is accurate only as of the date of such prospectus, regardless of the time of delivery of such prospectus or of any sale of our Class A shares.

        Until                        , 2011, all dealers that buy, sell or trade our Class A shares, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

        No action is being taken in any jurisdiction outside the United States to permit a public offering of our Class A shares or possession or distribution of this prospectus in any such jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to those jurisdictions.



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PROSPECTUS SUMMARY

        This summary highlights information contained elsewhere in this prospectus. This summary does not contain all the information you should consider before making your investment decision. You should carefully read the entire prospectus, including "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes, before making your investment decision. This summary contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results stated in or suggested by such forward-looking statements due to a variety of factors, including those set forth in "Risk Factors" and "Forward-Looking Statements."

Our Business

        We are the leading internet company in Russia, operating the most popular search engine and the most visited website. In 2010, we generated 64% of all search traffic in Russia and were the largest Russian internet company by revenue. In March 2011, our yandex.ru website attracted 38.3 million unique visitors. We also operate in Ukraine, Kazakhstan and Belarus. Our mission is to answer any question internet users may have. To that end, we utilize our capabilities in applied mathematics and data analysis and our in-depth knowledge of the languages, cultures and preferences of internet users in our markets to develop advanced search technology and information retrieval services. We also aggregate and organize extensive local, national and international content and offer a broad range of additional services. Our search and many of our services are location-based and are available in versions tailored for mobile and other digital platforms and devices.

        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 founding 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. Our users are our first priority, and we are committed to advancing our technology to continuously improve their internet experience.

        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 local search results in more than 1,400 cities. 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 news, shopping, blogs, images and videos. Our blog search includes feeds from leading blog hosting and social networking sites in Russia, including LiveJournal, Vkontakte and Facebook. We offer convenient access to our search engine through personal computers, mobile phones, tablets, and navigation and other digital devices. We also offer a wide range of specialized search, personalized and location-based services, including Yandex.News, Yandex.Market, Yandex.Mail and Yandex.Maps.

        Our homepage, which attracted 24.7 million unique visitors in March 2011 according to TNS, 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. Our homepage can easily be customized by users to address their individual interests.

        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 principally consists of graphical ads that appear on specific webpages. Our ads are clearly marked and

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separate from our organic search results and from the content of the webpages on which they may also appear. We do not serve intrusive ads, such as "pop-ups," that might detract from our users' experience.

        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 ourselves and extend the audience reach of our advertisers. Our Yandex.Direct service, launched in 2001, is an automated, auction-based system for the placement of text-based advertising in Russia that makes it easy for advertisers to bid for desired keywords and to obtain the best price for their ads. Yandex.Direct is the largest service of its kind in Russia, based on market share of text-based advertising. We served ads for more than 127,000 advertisers in the first quarter of 2011, compared with 92,000 in the first quarter of 2010, 180,000 in the full year 2010 and 131,000 in the full year 2009, including many small and medium-size businesses throughout Russia and the other countries in which we operate.

Competitive Strengths

        We believe that we benefit from the following key strengths:

    we are the internet market leader in Russia by revenue, with the most popular search engine and most visited website

    we are at the forefront of search and information retrieval technology

    we deliver best-in-class user services

    we have a proven track record of monetization

    we attract and nurture world-class talent

Our Strategy

        Our mission is to answer any question internet users may have. We seek to structure and make easily accessible the wealth of content available on the internet, as well as to actively expand the scope and usefulness of that content. To fulfill our mission, we intend to:

    continuously enhance our users' internet experience

    continue to develop services for mobile and other digital platforms and devices

    further leverage our broad base of users, advertisers and ad network partners to drive monetization

    expand our presence in our current markets, while considering selective expansion into additional geographies

    increase the scope, accessibility and usefulness of content on the internet

    maintain a talented workforce and a creative and participatory culture

Our Industry

        The internet is becoming an increasingly significant advertising medium in Russia and the other countries in which we operate. Overall, we believe that our industry presents attractive growth prospects for a number of reasons, including the following:

    the Russian economy is expected to continue to grow faster than more developed economies

    Russian internet penetration significantly lags that observed in more developed countries, and is expected to increase at a faster rate

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    mobile internet penetration and smartphone adoption rates are increasing in Russia, and search and location-based services are well-suited for mobile applications

    the Russian advertising market has been growing faster than both the global advertising market and the overall Russian economy, and these trends are expected to continue

    the Russian online advertising market is expected to continue to outpace both the global online advertising market and the overall Russian advertising market

    text-based advertising continued to grow during the economic downturn and is expected to grow strongly in future periods

    e-commerce is growing, with search being a major facilitator of online commerce

Corporate Information

        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 in The Hague, the Netherlands, and its business office is at Laan Copes van Cattenburch 52, 2585 GB The Hague, the Netherlands. The executive offices of our principal operating subsidiary are located at 16, Leo Tolstoy Street, Moscow 119021, Russian Federation (tel. +7-495-739-7000), and we currently have additional offices in Saint Petersburg, Ekaterinburg, Kazan, Novosibirsk and Rostov-on-Don in Russia, Kiev, Odessa and Simferopol in Ukraine and Palo Alto, California, USA.

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THE OFFERING

Class A shares offered:

   
   

By Yandex

  15,400,000 Class A shares
   

By selling shareholders

  36,774,088 Class A shares
   

Total

  52,174,088 Class A shares

Ordinary shares to be outstanding immediately after this offering:

   
   

Class A

  129,200,543 shares, representing 6.3% of the total voting power of our outstanding shares
   

Class B

  192,046,915 shares, representing 93.7% of the total voting power of our outstanding shares
   

Total

  321,247,458 shares

Offering price range

  $20.00 to $22.00 per Class A share

Listing

  We have applied for listing of our Class A shares on the NASDAQ Global Market under the symbol "YNDX."

Over-allotment option

  We and the selling shareholders have granted to the underwriters an option, which is exercisable within 30 days from the date of this prospectus, to purchase an aggregate of up to an additional 5,217,405 Class A shares. See "Underwriting" for more information.

Use of proceeds

  We intend to use the net proceeds of this offering for general corporate purposes, including investments in technology infrastructure, particularly new servers and data centers. We may also use a portion of the net proceeds for the acquisition of, or investments in, technologies, teams or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or make any such investments. See "Use of Proceeds" for additional information. We will not receive any of the proceeds from the sale of Class A shares by the selling shareholders.

Lock-up

  We have agreed with the underwriters on a lock-up of our shares for a period of 180 days after the date of this prospectus. Arkady Volozh, our CEO and one of our founders, has agreed that all of the shares he holds immediately following this offering will be subject to a lock-up period of one year following the date of this prospectus, and one-half will be subject to a lock-up period of two years. Ilya Segalovich, our CTO and one of our founders, has agreed that the shares he holds immediately following this offering will be subject to a lock-up period of one year following the date of this prospectus. All other employees and shareholders have agreed to a lock-up period of 180 days following the date of this prospectus. See "Underwriting."

Risk factors

  See "Risk Factors" and other information included in this prospectus for a discussion of risks you should carefully consider before investing in our Class A shares.

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        The total number of shares that will be outstanding immediately after this offering includes:

    an aggregate of 303,815,518 Class A and Class B shares outstanding as of April 30, 2011;

    15,400,000 Class A shares to be sold by us in this offering; and

    2,031,940 Class A shares to be issued upon the exercise of options in connection with this offering by certain selling shareholders and sold by such shareholders in this offering;

        and excludes:

    15,648,342 shares issuable upon the exercise of options outstanding as of the date of this prospectus at a weighted average exercise price of $3.71 per share. These consist of options that may be exercised for an aggregate of either 7,989,036 Class A or Class B shares (depending on whether the option holders elect to sell or hold their shares), and options that may be exercised for an aggregate of 7,659,306 Class A shares only. See "Management—Compensation—Share Options;"

    831,000 Class A shares issuable upon the exercise of options that we will grant on the closing of this offering to employees and directors at an exercise price per share equal to the offering price;

    16,015,003 Class A shares reserved for future issuance (but not currently outstanding) under our Amended and Restated 2007 Share Option Plan;

    any Class C shares held by the Yandex Conversion Foundation, which will be repurchased by us promptly following the closing of this offering and cancelled at our next general meeting of shareholders. See "Description of Share Capital—Ordinary Shares;" and

    one priority share issued to OJSC Sberbank of Russia ("Sberbank"), approximately 60% of the voting shares of which are held by the Central Bank of the Russian Federation. The holder of the priority share has the following material rights:

    the right to approve the accumulation of beneficial or legal ownership of 25% or more, in number or by voting power, of our outstanding Class A and Class B shares (taken together) if our board of directors were to approve such an accumulation of shares; and

    the right to approve any decision by our board of directors to transfer, directly or indirectly, all or substantially all of our assets to one or more third parties, including the sale of our principal Russian operating subsidiary.

        See "Description of Share Capital—Priority Share."

        Unless otherwise indicated:

    all share numbers in this prospectus give effect to a share reorganization that took place in October 2008, which had the effect of a 28-for-one share split and resulted in the conversion of all our ordinary shares in issue on such date into Class B shares; and

    information in this prospectus assumes that the underwriters do not exercise their over-allotment option to purchase an aggregate of up to an additional 5,217,405 Class A shares from us and the selling shareholders.

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SUMMARY CONSOLIDATED FINANCIAL DATA

        The summary consolidated statements of income data for the years ended December 31, 2008, 2009 and 2010 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The summary consolidated statements of income data for the three months ended March 31, 2010 and 2011 and the summary consolidated balance sheet data as of March 31, 2011 are derived from our unaudited condensed consolidated financial statements appearing elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared using the same accounting principles and on the same basis as the year-end financial statements and include all adjustments that management considers necessary for the fair presentation of the financial information set forth in those statements. Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP.

        Russian ruble ("RUR") amounts have been translated into U.S. dollars at a rate of RUR 28.4290 to $1.00, the official exchange rate quoted as of March 31, 2011 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 May 5, 2011, the exchange rate was RUR 27.3675 to $1.00.

        You should read the following summary consolidated financial data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes appearing elsewhere in this prospectus. These historical results are not necessarily indicative of the results to be expected for any future period.

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  Year ended December 31,   Three months ended March 31,  
 
  2008   2009   2010   2010   2011  
 
  RUR   RUR   RUR   $   RUR   RUR   $  
 
  (in millions, except share and per share data)
 

Consolidated statements of income data:

                                           

Revenues

    7,649     8,729     12,500     439.7     2,355     3,894     137.0  

Operating costs and expenses:

                                           
 

Cost of revenues(1)

    1,701     2,086     2,585     90.9     539     894     31.4  
 

Product development(1)

    1,013     1,619     2,073     72.9     486     723     25.5  
 

Sales, general and administrative(1)

    1,250     1,474     1,838     64.7     372     628     22.1  
 

Depreciation and amortization

    600     912     1,181     41.5     259     377     13.3  
                               

Total operating costs and expenses

    4,564     6,091     7,677     270.0     1,656     2,622     92.3  

Income from operations

    3,085     2,638     4,823     169.7     699     1,272     44.7  
 

Interest income

    86     67     156     5.5     28     34     1.2  
 

Other income/(expense), net(2)

    208     (23 )   24     0.8     (57 )   (254 )   (8.9 )
                               

Net income before income taxes

    3,379     2,682     5,003     176.0     670     1,052     37.0  

Provision for income taxes

    947     672     1,186     41.7     163     232     8.2  
                               

Net income

    2,432     2,010     3,817     134.3     507     820     28.8  
                               

Net income per Class A and Class B share:

                                           
 

Basic

    8.04     6.63     12.56     0.44     1.67     2.70     0.09  
                               
 

Diluted

    7.93     6.52     12.37     0.44     1.65     2.60     0.09  
                               

Weighted average number of ordinary shares outstanding:

                                           
 

Basic

    302,489,809     303,109,083     303,817,388     303,817,388     303,815,518     303,815,518     303,815,518  
 

Diluted

    306,893,587     308,156,196     308,580,600     308,580,600     306,964,554     315,230,574     315,230,574  

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

 

Cost of revenues

    6     10     16     0.6     4     6     0.2  
 

Product development

    42     60     87     3.1     18     32     1.1  
 

Sales, general and administrative

    92     139     57     2.0     11     32     1.1  
(2)
Other income/(expense) primarily comprises foreign exchange gains and losses generally resulting from changes in the value of the U.S. dollar as compared to 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 income statement. In 2008, other income includes RUR 65 million of foreign exchange gains arising from the appreciation of the U.S. dollar as compared to the Russian ruble principally in the fourth quarter of that year. In contrast, in the three months ended March 31, 2011, we recorded as other expense RUR 254 million in foreign exchange losses arising from the material decline in the value of the U.S. dollar as compared to the Russian ruble during that period. Although the U.S. dollar value of our U.S. dollar-denominated cash, cash equivalents and term deposits was not impacted by these currency fluctuations, they resulted in upward and downward re-valuations, respectively, of the ruble equivalent of these U.S. dollar-denominated monetary assets. Other income/(expense) also includes other non-operating gains and losses and, in 2008, includes RUR 120 million of other income related to a cash penalty paid to us in connection with the termination of a preliminary lease agreement.

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        The following table summarizes our balance sheet data as of March 31, 2011:

    on an actual basis; and

    on a pro forma basis to reflect:

    the receipt by us of estimated net proceeds of $305.5 million from the sale of 15,400,000 Class A shares offered by us, at an assumed initial public offering price of $21.00 per Class A share (the midpoint of the estimated price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and offering expenses payable by us; and

    the exercise of options to purchase 2,031,940 Class A shares by certain selling shareholders in connection with this offering and the receipt by us of proceeds of $4,548,538 from the exercise of these options.

   
  As of March 31, 2011  
   
  Actual   Pro forma  
   
  RUR   $   RUR   $  
   
  (in millions)
 
 

Consolidated balance sheet data:

                         
 

Cash and cash equivalents(1)

    3,154     110.9     11,970     421.0  
 

Term deposits (current and non-current)

    3,574     125.7     3,574     125.7  
 

Total assets

    13,587     477.9     22,403     788.0  
 

Total current liabilities

    3,161     111.1     3,161     111.1  
 

Total non-current liabilities

    64     2.3     64     2.3  
 

Total shareholders' equity

    10,362     364.5     19,178     674.6  

(1)
As of March 31, 2011, our cash and cash equivalents included RUR 879 million ($30.9 million) of cash held by us (a) on behalf of Yandex.Money account holders and (b) to settle online payments in the process of being cleared by Yandex.Money.

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RISK FACTORS

        Investing in our Class A shares involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus and any free-writing prospectus before deciding to invest in our Class A shares. The risks and uncertainties described below and elsewhere in this prospectus, including in the section headed "Management's Discussion and Analysis of Financial Condition and Results of Operations," 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 the following 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, and you could lose some or all of your investment.

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 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. We compete with Google in the market for internet search, text-based advertising and other services. Google launched its Russian-language search engine in 2001, and opened its first office in Russia and introduced Russian-language morphology-based search capabilities in 2006. It conducts extensive online and offline advertising campaigns in Russia. Google offers a competitive search engine, as well as online advertising solutions that compete with our Yandex.Direct service. According to Liveinternet.ru, Google.ru's share of the Russian search market for the first quarter of 2011, based on search traffic generated, was 22% compared with our market share of 65%. We expect that Google will continue to use its brand recognition and financial and engineering resources to compete aggressively with us. For example, Google has introduced its own popular mobile platform, Android, which may allow it to exert significant influence over the introduction of mobile applications on Android-based devices, and to influence the mobile advertising market. In addition to Google, we also face competition from the Russian and international websites of Microsoft and Yahoo!.

        On the domestic level, our principal competitor is Mail.ru. We compete with Mail.ru in the market for text-based advertising, 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, including some services that are more widely used than ours. We also compete with Russian online advertising networks, such as Begun, which direct advertising to a number of popular Russian websites. In addition, representatives of the Russian government, including the president, have publicly stated as recently as January 2011 that the development of a "national" search engine is a government priority. Such a government-owned or government-controlled search engine, if launched, could create additional competition for our search service, and could benefit from favorable governmental subsidies and other benefits and preferences not available to us.

        Although we have partnerships with a number of social networking sites, such as Facebook, Vkontakte, and Mail.ru's Odnoklassniki and My World, 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

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find information, get answers and buy products, which may 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 start-ups and other established companies 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 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.

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 more than 97% 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. During the 2008-2009 global economic crisis, total advertising spending in Russia declined by 26% in ruble terms, from a pre-crisis high of RUR 295.8 billion in 2008 to a low of RUR 215.3 billion in 2009, before increasing to RUR 249.9 billion in 2010. Online advertising spending was less materially affected than overall advertising spending, increasing from RUR 12.7 billion in 2007 to RUR 17.6 billion in 2008, RUR 19.1 billion in 2009 and RUR 26.7 billion in 2010. Although forecasts for online advertising spending in Russia indicate sustained annual growth through 2013, any decreases in or delays in online advertising spending due to economic conditions, or otherwise, would materially adversely impact our business, financial condition and results of operations.

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. The level of spending on advertising in Russia is relatively low compared to that in more developed countries, and the use of the internet as a marketing channel is at a relatively early stage. The internet and broadband penetration rates in Russia are also relatively low compared to those in more developed countries. The internet competes with traditional advertising media, such as television, print, radio and outdoor advertising. Many 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 not consider the internet effective in promoting their products and services compared with traditional media.

        Any decline in the appeal of the internet generally in the countries in which we operate, whether as a result of 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.

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 not 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.

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        If we are unable to continue to develop and provide our users with quality and up-to-date services, and to appropriately time them with market opportunities, our user base may shrink. 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 shrink or fail to grow, and our business would be harmed.

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

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

        Although we expect our revenues to continue to grow, the rate of growth will likely decline over time due to a number of factors, including the difficulty of maintaining our rate of growth relative to an increasingly larger revenue base, additional competition and the increasing maturity of the online advertising market.

        Our operating margin may also experience downward pressure as a result of increased expenditures for many aspects of our business, particularly the expansion of our data centers to support growth in our current markets and potentially into new geographies. It may also decline as our Yandex ad network grows because the operating margin we realize on revenues generated from partner websites is significantly lower than the operating margin generated from our own websites. Our operating margins are lower on these revenues because we pay to our network partners, on average, more than 50% of the advertising fees we earn from serving ads on Yandex ad network websites. The margin we earn, on average, on revenue generated from the Yandex ad network could also decrease in the future if we are required to share with our partners a greater percentage of the advertising fees generated through their websites.

        Our operating margin may also decline as a result of fees or revenue sharing arrangements with our distribution partners that, for example, distribute our browser toolbar or search bar or otherwise direct search queries to our website. We generally compensate our distribution partners on a revenue-sharing basis or on the basis of the number of our browser toolbars or search bars installed. We expect to continue to expand the number of our distribution relationships in order to increase our user base and to make it easier for our existing users to access our services.

        Moreover, our operating margin may also decline as a result of increases in our operating expenses as we expand our operations and continue to fund greater levels of product development. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Trends Impacting Our Results of Operations."

We rely on our Yandex ad network partners for a material portion of our revenues and benefit from our relationships with them. The loss of these partners would adversely affect our business, financial condition and results of operations.

        We direct advertising to our Yandex ad network partners, with revenues from advertising on partner websites representing 12.5% of our advertising revenues in 2010. Although our operating margin is lower on revenues derived from this network due to our revenue-sharing arrangements with our partners, we consider this network to be critical to the future growth of our business. Our agreements with the network partners 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 obtain market share 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.

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        Many of our key network partners operate high-profile websites, and we derive tangible and intangible benefits from this affiliation, such as increased user numbers, extended brand awareness and greater audience reach for our advertisers. If our relationship with any of these partners is terminated or not renewed and we do not replace those relationships with comparable relationships, our business, financial condition and results of operations would be adversely affected. In 2009, our agreement pursuant to which we powered Mail.ru's search results and served ads on its search result pages expired and was not renewed. Although the loss of this relationship did not have a material adverse effect on us, the future loss of a more significant relationship, or a number of such arrangements, could do so.

        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 and 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 significant planned marketing efforts, is critical to expanding our base of users, advertisers, network partners, and other business partners. Maintaining and enhancing our brand 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. If we 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.

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

        We have experienced, and continue to experience, rapid growth in our operations and headcount, which has placed, and will continue to place, significant demands on our management and our operational and financial infrastructure. 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 increase our investment in technology, infrastructure, facilities and other areas of operations, in particular, product development and sales and marketing. As a result of such growth, we will need to continue improving our operational and financial systems and managerial control and procedures. We will also have to maintain close coordination among our technical, accounting, finance, marketing and sales personnel. The required improvements may include:

    continuing to improve our technology infrastructure to maintain the effectiveness of our search systems, advertising platform and other services; and

    enhancing our accounting and internal control systems to ensure timely and accurate reporting of all of our operations.

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        Enhancements and improvements of operational and financial systems will require capital expenditures and allocation of valuable management resources. 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 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 we grow, and are required to implement more complex organizational management structures, we may find it increasingly difficult to maintain the beneficial aspects of our corporate culture. This 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. In particular, our founders, our Chief Executive Officer, Arkady Volozh, and Chief Technology Officer, Ilya Segalovich, are critical to the development of our technology, our culture and our strategic direction.

        Our future success will also depend on our continued ability to attract, retain and motivate other highly qualified 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 options under our employee share option plan, we cannot guarantee that we will be able to retain our key employees. Our outstanding option grants to many of our senior management personnel and other key employees have become, or will soon become, substantially vested. Although we grant additional share options to management personnel and other key employees from time to time, employees may be more likely to leave us after their initial option grant fully vests, especially if the shares underlying the options have significantly appreciated in value relative to the option exercise price. If any member of our senior management team or other key personnel should leave our company, 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 comply with the internal control requirements under the Sarbanes-Oxley Act and related regulations.

        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.

We are increasingly using distribution arrangements with third parties to expand our user base, and any failure to obtain or maintain such relationships on reasonable terms could have a material adverse effect on our business, financial condition and results of operations.

        To expand our user base and increase traffic to our sites, we are increasingly using arrangements with leading software companies for the distribution of our technology, including our Yandex.Bar browser

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toolbar. In particular, we have agreements, on a co-marketing basis, with certain internet browsers. In addition, several mobile device manufacturers include Yandex as the default search engine on certain models of handsets in Russia. 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. In the future, existing and potential distribution partners may not offer or renew distribution opportunities 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.

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 the first quarter of 2011 derived only approximately 3% of our revenues from advertisers outside Russia. Part of our future growth strategy is to expand our operations geographically on an opportunistic basis. Our ability to manage our business and conduct our operations across a broader range of geographies would require considerable management attention and resources and is subject to a number of risks relating to new markets, including the following:

    challenges caused by distance, language and cultural differences;

    uncertainty regarding liability for services and content;

    credit risk and higher levels of payment fraud in certain countries;

    pressure on our operating margins as we invest to support our expansion;

    currency exchange rate fluctuations and our ability to manage our currency exposure;

    foreign exchange controls that might prevent us from repatriating cash earned in certain countries;

    increased risk of claims for infringement of intellectual property;

    potentially adverse tax consequences; and

    higher costs and greater management time associated with doing business internationally.

        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, sanctions, internal and disclosure control rules, data 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 to one or more countries, and may also 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.

Fluctuations in currency exchange rates may materially adversely affect our business, financial condition and results of operations.

        The Russian ruble has experienced significant fluctuations against foreign currencies, including the U.S. dollar, in recent years. Although our revenues and expenses are both primarily denominated in

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Russian rubles, the majority of our rent expenses, including the lease for our Moscow headquarters, is denominated in U.S. dollars. In April 2011, we entered into leases for an additional 11,000 square meters of office space in Moscow, under which the rent is denominated in U.S. dollars but payable in rubles, and which protect the landlord against depreciation of the U.S. dollar. Additionally, a major portion of our capital expenditures, primarily for servers and networking equipment, although payable in rubles, are imported and can therefore be materially affected by changes in the U.S. dollar to Russian ruble exchange rate. By keeping most of our funds in U.S. dollars, we seek to ensure that we maintain sufficient cash balances to match short-term U.S. dollar-denominated liabilities. If the Russian ruble were to experience a prolonged and significant decline against foreign currencies, however, we could face material currency foreign exchange exposure, which may materially adversely affect our business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures about Market Risk."

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 future results of operations may fluctuate from period to period as a result of any of the risk factors described in this prospectus and, in particular, due to:

    economic conditions generally and those specific to the internet and online advertising;

    the level of use of internet search engines to find information;

    the amount of advertising purchased and market prices for online advertising;

    the volume of searches conducted, the amounts bid by advertisers or the number of advertisers that bid in our advertising system;

    our ability to compete effectively for users, advertisers, partner websites and content; and

    the proportion of our revenues generated on our websites relative to those generated through the Yandex ad network or through distribution partners, as a result of the revenue-sharing arrangements we enter into and the overall volume of advertising we provide to our partners.

Due to the seasonal nature of advertising spending, 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, online spending and traffic historically slowing down during January, May and June 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 you should not rely on past results 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.

Index spammers could harm the integrity of our search results, which may damage our reputation, cause our users to be dissatisfied with our services and adversely affect our business, financial condition and results of operations.

        There is an ongoing and increasing effort by so-called "index spammers" 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. We take this problem seriously because providing relevant information to users is at the core of our business and critical to our success. 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.

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Our business, financial condition and results of operations could be adversely affected by malicious applications that interfere with or exploit security flaws in our services.

        Third parties have in the past attempted, and may in the future attempt, to use malicious applications to change our users' internet experience, including hijacking queries to our search engine, altering or replacing Yandex search results, or otherwise interfering with 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. These applications may be difficult or impossible to uninstall or disable, may reinstall themselves and may circumvent other applications' efforts to block or remove them.

        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. The ability to reach users and provide them with a superior experience is critical to our success. 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. Ad-blocking technology, if used effectively, would reduce the amount of revenue generated by the ads we serve and 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 our ads 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 occurs when a user intentionally clicks on an ad displayed on a website for a reason other than to view the underlying content. We monitor our own websites and those of our partners for click fraud and proactively seek to prevent click fraud and filter out fraudulent 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 of amounts previously paid to our network partners. This negatively affects our profitability, and these invalid clicks may harm our brand. If invalid clicks are not detected, the affected advertisers may experience a reduced return on their investment in our advertising services because the invalid clicks will not lead to potential revenue. This may lead the advertisers to become dissatisfied with our advertising services, which may in turn lead to litigation alleging click fraud, a loss of advertisers and adversely affect our business, financial condition and results of operations.

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. 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

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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 the inclusion of their content or documents in their formats from being searchable, this would mean that such content would not be included in our search results even if the content was directly relevant to a search. 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. 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 trademarks, trade secrets and copyrights, as well as nondisclosure agreements, to protect our intellectual property rights. We have not sought, nor do we intend to seek, patent protection for any of the intellectual property we have developed. The protection of intellectual property rights in Russia and other markets in which we operate 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 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 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 the 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.

We may be subject to claims from our current or former employees for copyright-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, algorithms and images that we use for the operation of our services were generally developed, invented or created by our former or current employees during the course of their employment with us and within the scope of their job functions. As a matter of Russian law, we are deemed to have acquired copyright over such products, and have the exclusive rights to their further use and disposal subject to compliance with certain requirements set 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 determined by the Russian courts. Therefore, former or current

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employees could challenge either the transfer of exclusive rights over the products developed by them or may claim the right to additional compensation for their inventions, in addition to their employment compensation. Although we believe that we would prevail in any such actions, we cannot assure you that we would do so. Any successful claim could adversely affect our business, financial condition and results of operation.

We may be held liable to third parties for information or content displayed on, retrieved from or linked to our websites, or distributed to website users, which could harm our reputation and business.

        We provide a wide variety of services that enable individuals and businesses to exchange information, generate content, advertise products and services, conduct business and engage in various online activities. The law relating to the liability of providers of such online services for the activities of their users is currently not settled in Russia and 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 or image services, if appropriate licences and/or third-party consents have not been obtained. Third parties may also seek to assert claims against us alleging unfair competition or 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.

        From time to time we have received notices from individuals who do not want their names or websites to appear in our search results when certain keywords are searched. It is possible that we could be held liable when that information appears in our search results. Claims could also be brought against us for operating anti-spam technologies fighting spam on our search results and email service. If one of these complaints results in liability to us, it could potentially be costly, encourage similar lawsuits, distract management and harm our reputation and possibly our business. In addition, increased attention to these issues and related legislative proposals could harm our reputation or otherwise affect the growth of our business.

        We are also regularly approached and asked to remove content uploaded by users on the grounds of alleged copyright infringement. In such cases, we investigate the claims and any uploads that appear to infringe the rights of a third party are removed as a matter of policy. It is not possible to review all content linked to or posted on our websites, and the risk of infringement of third-party intellectual property rights remains. Although we have guidelines and procedures designed to reduce the likelihood that user content might be used without proper licences or third-party consents, these guidelines and procedures may not be effective in preventing the unauthorized posting of copyrighted material. Moreover, although we may seek to recover any losses resulting from the unauthorized posting of copyrighted material from the infringing users, it may be impractical for us to recover losses from such users. Although there have been a number of recent court proceedings in Russia concerning the unauthorized posting by users of copyrighted content on websites, there has been no legislation or settled court practice that provides clear guidance as to whether or under what circumstances hosting providers and administrators of websites and internet portals can be held liable for the unauthorized posting by users of copyrighted material. The frequency of these claims may increase, however, due to recent amendments to the Russian Civil Code, which came into legal force in October 2010, that introduced additional limitations on any reproduction of content without a copyright owner's consent and without remuneration to the owner. See "Government Regulation."

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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.

        Current or future Russian and foreign laws and regulations may govern the collection, use, sharing and security of data that we receive from our users and partners. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with current practice. If so, 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. 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 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.

We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to public company compliance requirements, which may adversely affect our business.

        As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules of the U.S. Securities and Exchange Commission, or SEC, and the NASDAQ Stock Market, impose a variety of requirements on public companies, including with respect to corporate governance practices. In addition, we will be subject to supervision by the Dutch Authority for the Financial Markets (Stichting Autoriteit Financiële Markten, or AFM) under the Dutch Act on the Supervision of Financial Reporting (Wet toezicht financiële verslaggeving). Our management and other personnel will need to devote a substantial amount of time to compliance matters. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations will make it more difficult and expensive for us to obtain director and officer liability insurance, and we will be required to incur substantial costs to maintain the same or similar coverage.

        The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, commencing with our fiscal year ending December 31, 2012, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial expense and expend significant management efforts. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our Class A shares could decline and we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities, which would require additional financial and management resources.

        Although we do not believe that the increased costs associated with operating as a public company will be material to our overall financial condition or results of operations, they may result in a modest decrease in our operating margins. Additionally, if these requirements divert our management's attention from other business concerns, they may materially adversely affect our business.

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We rely on third-party providers for our principal internet connections and equipment critical to our 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 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. 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 adapt our 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 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, particularly in and around Moscow. 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.

We do not carry the insurance coverage commonly carried by companies in our industry, and as a result may experience substantial loss or disruption that could materially adversely affect our business, financial condition and results of operations.

        At present, we do not insure our data centers or carry business interruption or key man insurance, primarily because the high cost of insurance in Russia makes it more economically rational to self-insure. We also believe that our redundant data centers would allow us to avoid or minimize any potential business interruption. We do not maintain separate funds or otherwise set aside cash reserves for related losses. Any such loss could materially 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.

        Although we have implemented network security measures, our systems are potentially vulnerable to damage or interruption from terrorist attacks, denial-of-service attacks, computer viruses or other 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. Although we have tested our ability to maintain current levels of operations even with the loss of one of our data centers, our disaster recovery planning cannot account for all eventualities. The occurrence of a natural disaster or other unanticipated problems at our data centers could result in lengthy interruptions in our service. Any

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damage to or failure of our systems could also result in interruptions in our service. Interruptions in our service could reduce our revenues and profits, and our brand could be damaged if people believe our services are unreliable. We do not carry business interruption insurance to compensate us for losses that may occur as a result of any events that cause interruptions in our service.

        From time to time, we have experienced power outages that have interrupted access to our services and impacted the functioning of our internal systems. We have installed back-up generators to enable our systems to function during power outages. Back-up generators may not operate properly through a major sustained power outage and their fuel supply could be inadequate. Any unscheduled interruption in our service 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 not successfully reduce the frequency or duration of unscheduled downtime.

        In addition to physical damage and power outages, our systems are vulnerable to human error. Any error on the part of 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.

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.

        We have limited experience with acquisitions, and the acquisitions we have made to date have been relatively small. We evaluate selected potential acquisitions and, from time to time, may engage in discussions regarding potential acquisitions. Any of these transactions may be material to our business, financial condition and results of operations. The acquisition and integration of new businesses or technologies pose significant risks to our existing operations, including:

    additional demands placed on our management, who are also responsible for managing our existing operations;

    increased overall operating complexity of our business, requiring greater personnel and other resources;

    difficulties in expanding beyond our core expertise; and

    significant initial cash expenditures or share dilution in connection with acquiring and integrating new businesses.

        Achieving the desired benefits of any acquisitions will depend, in part, on integrating our businesses in an efficient manner. The integration of new businesses may be difficult for a variety of reasons, including differing cultures or management styles, poor financial records or internal controls on the part of acquired

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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 will be 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 that make up the Commonwealth of Independent States ("CIS"), such financial statements 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.

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 aggregate and deliver compelling content. We license from third parties much of the content of our services, such as 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 which 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.

We may have difficulty leasing or purchasing adequate space in central Moscow as needed, which could materially increase our operating costs.

        Our headquarters and main development and operating center are located in a single facility in central Moscow. Real estate in central Moscow is expensive and supply in the market is limited, particularly in areas with convenient transportation access. Our headcount has increased significantly in a relatively short period of time and we expect it to continue to increase materially over the next few years. In April 2011, we entered into leases for an additional 11,000 square meters of office space in the complex in which our headquarters are located. Nevertheless, we currently anticipate that we will need to buy or lease additional office space in central Moscow within the next couple of years. We may find it difficult to acquire or lease additional facilities sufficient to accommodate our expected growth on acceptable terms, which could materially increase our operating costs.

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

        Our online payment system 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:

    illegal online gambling;

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    fraudulent sales of goods or services or other merchant fraud;

    illicit sales of prescription medications, controlled substances, alcoholic beverages or tobacco products;

    software and other intellectual property piracy;

    bank or securities fraud, identity theft or money laundering;

    improper use of the service for business-to-business transactions;

    child pornography or trafficking; and

    other illegal or improper purposes.

        If we are unable to prevent, detect or otherwise adequately address fraud or other improper uses of Yandex.Money, users may lose confidence in the integrity and security of our service, 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 our 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 about our Yandex.Money or other services and may adversely affect business, financial condition and results of operations.

        Customer complaints or negative publicity about our services, or breaches of our customers' privacy and our security measures, could diminish consumer confidence in and use of our services. Measures we sometimes take to combat risks of fraud and breaches of privacy and security, such as freezing customer funds in our Yandex.Money system, may damage relations with 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. Any inability by us to manage or train our customer service representatives properly could compromise our ability to handle customer complaints effectively. If we 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 measurement methods in those countries. Any discussion in this prospectus of matters relating to our market position in the Ukraine, Kazakhstan and Belarus markets is subject to uncertainty due to the potential incompleteness or unreliability of available third-party information.

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

Economic crises may materially adversely affect our business, financial condition and results of operations.

        In the period from 2000 through the first half of 2008, Russia experienced rapid economic growth, a stable and strengthening currency, higher tax collections, a reduction in inflation and positive capital and current account balances. The Russian economy was adversely affected, however, by the global financial and economic crisis, which began in the second half of 2008. In Russia, the crisis led to extreme volatility in the debt and equity markets, reductions in foreign investment, sharp decreases in gross domestic product, reductions in disposable income, a bank liquidity crisis, significant ruble depreciation against the U.S. dollar and the Euro, and the rise of unemployment. The total spending on media advertising in Russia decreased by 42% in dollar terms and 26% in ruble terms in 2009 compared to 2008.

        Although economic conditions have improved, we cannot assure you that the recovery of the economy in Russia and the other countries in which we operate will be sustained. Moreover, any future deterioration of the international economic situation would likely negatively impact the economies in the countries in which we operate and, as a result, adversely affect the profitability of our business.

        In addition, the Russian economy is dependent on exports of natural resources, and therefore particularly sensitive to fluctuations in the world prices of crude oil, natural gas and other commodities, which reached record high levels in mid-2008 and have since experienced significant decreases. A sustained decline in the price of crude oil, natural gas and other commodities may further disrupt the Russian economy and result in reductions in consumer spending and therefore advertising spend.

        The recent global recession and any future downturns in the markets in which we operate could reduce demand for our services, constrain our ability to find new users and advertising customers or retain existing ones and to collect payments from them, and may prevent us from executing our growth strategy. Adverse economic conditions may also hurt our liquidity, which may have a material adverse effect on our business, financial condition and results of operations.

Emerging markets, such as Russia, are generally subject to greater risks than more developed markets, and global financial or economic crises or turmoil in any large emerging market economy may have a material adverse effect on our business, financial condition and results of operations.

        Global financial or economic crises or financial turmoil in any large emerging market country tend to adversely affect prices in equity markets of most or all emerging markets as investors move their money to more stable, developed markets. The Russian equity markets were highly volatile beginning in the second half of 2008, principally due to the impact of the global financial and economic crises on the Russian economy. Future financial problems 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. In addition, during such times, businesses that operate in emerging markets can face severe liquidity constraints as foreign funding sources are withdrawn. For these reasons, our business, financial condition and results of operations may be materially adversely affected by any future global or Russian financial crises.

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

        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 13.3% in 2008, 8.8% in 2009, 8.8% in 2010 and 3.8% in the first quarter of 2011, 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 we cannot assure you that these increases in cost will not negatively impact our operating margin.

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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:

    inconsistencies between and among laws and regulations;

    gaps in the regulatory structure resulting from the delay in adoption or absence of implementing regulations;

    selective enforcement of laws or regulations, sometimes in ways that have been perceived as being motivated by political or financial considerations;

    limited judicial and administrative guidance on interpreting legislation;

    relatively limited experience of judges and courts in interpreting recent commercial legislation;

    a perceived lack of judicial and prosecutorial independence from political, social and commercial forces;

    inadequate court system resources;

    a high degree of discretion on the part of the judiciary and governmental authorities; and

    poorly developed bankruptcy procedures that are subject to abuse.

        In addition, as is true of civil law systems generally, judicial precedents generally have no binding effect on subsequent decisions. Not all legislation and court decisions are readily available to the public or organized in a manner that facilitates understanding. Enforcement of court orders can in practice be very difficult. All of these factors make judicial decisions difficult to predict and effective redress uncertain. Additionally, court claims and governmental prosecutions may be used in furtherance of what some perceive to be political aims.

        The untested nature of much of recent legislation in the countries in which we operate and the rapid evolution of their legal systems may result in ambiguities, inconsistencies and anomalies in the application and interpretation of laws and regulations. Any of these factors may 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 the value of our Class A shares and our business, financial condition and results of operations.

The legal framework governing internet services and e-commerce in Russia and the other countries in which we operate is not well developed, 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.

        Although we believe that we have all material licenses or permits 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. In particular:

    Current Russian law requires that a company hold a "telematics" license if it provides services for a fee by means of telecommunications services. We do not charge for the internet services we provide to our users and therefore believe we are not required to hold a telematics license; we do, however, generate revenue from ads directed to our users. It is possible that a Russian court or a government agency may construe our advertising revenue as an indirect "fee" and determine that we are required to hold a telematics license.

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    Russian businesses that use certain encryption technologies in their products and services may be required to obtain a license from the Russian Federal Security Service. We have recently obtained encryption licenses in connection with our Yandex.Money service, although we cannot assure you that that we will be able to maintain these licenses or ensure compliance with all applicable requirements. We could be subject to administrative liability if the relevant authorities were to determine that we delivered encryption services without proper authorization prior to the time when we obtained such licenses.

    Russian law requires that "mass media" businesses be registered with the applicable governmental authority. Although Russian law does not specifically include internet enterprises in the list of mass media businesses, several internet businesses that publish news have been required to obtain an electronic mass media registration. Our principal operating subsidiary, which operates our search and most of our other user services, does not hold a mass media registration. As an aggregator of various news sources, we do not believe that we require a mass media registration for such services. If the applicable authorities were to determine otherwise, our principal operating subsidiary would be required to obtain an electronic mass media registration and may be required to pay fines for non-compliance. Obtaining and maintaining such registration may be burdensome and costly, and may adversely affect our business.

        We may have to apply for additional licenses, permits or registrations to comply with new or existing legal requirements, which may be costly or may limit our flexibility to run our business. If we fail to obtain and maintain required licenses, permits or registrations, we may face fines, penalties or sanctions. These may include a requirement that we 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 collection and distribution of certain types of personal and other data via the internet, 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.

        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.

        Collection and handling of personal data by any entity or person in Russia must be performed in compliance with 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 necessary for the purposes of carrying out our contractual obligations to them. 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. The regulator has recently expressed the view that our subsidiary Yandex.Money should file a notification; we are currently evaluating this position. 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.

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Our Yandex.Money system may become subject to existing or new Russian banking regulations, which could impose additional costs or administrative burdens on us or could affect our ability to operate our Yandex.Money system.

        We understand that the Central Bank of Russia has expressed the view that an online payment service such as our Yandex.Money system is not subject to banking regulations. From time to time, however, various proposals are discussed in the Russian government that would subject Yandex.Money to such regulation. Legislation to regulate e-payment systems has been proposed and is currently being considered by the State Duma, the lower chamber of the Russian parliament. Such legislation, if adopted, may impose additional costs or administrative burdens on us. We cannot assure you that we will be able to operate our Yandex.Money system in compliance with such new legislation, if adopted, or existing banking regulations if they are deemed to apply to our service.

We may be subject to existing or new advertising legislation, which 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 otherwise possess the licences required to market and sell such products and services. Ads for certain products and services, such as alcohol, tobacco, pharmaceuticals and financial services, as well as ads aimed at minors, must comply with specific rules and must in certain cases contain specified disclosure. The application of these laws to parties, such as our company, that merely serve or distribute such 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.

        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, this may significantly limit our ability to enhance the targeting of our advertising, 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.

        Some older agreements with certain Yandex ad network partners contain provisions prohibiting them from showing text-based ads supplied by our competitors on the same page where our text-based ads appear, in order to avoid technical problems that previously arose from conflicting software code for multiple ad serving systems. Although we do not believe that such provisions are in violation of law, there is a possibility that the Russian antimonopoly authorities may take a different view, which may potentially subject us to fines or penalties.

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 almost entirely 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 with those offered by our foreign-based competitors and generally available worldwide over the internet. For example, our foreign competitors may be able to offer certain content that is now, or may in the future be, restricted by Russian law. 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.

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

        The Russian anti-monopoly authorities impose various requirements on companies that occupy a dominant position in their markets. We believe that the anti-monopoly authorities have not to date addressed internet advertising in Russia. If and when they do so, they may conclude that, given our market share, we hold a dominant position in one or more of the markets in which we operate. If they were to do so, this could result in limitations on our future acquisitions and a requirement that we pre-clear 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 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 annual revenues in the internet advertising market for the previous year. These limitations may reduce our operational and commercial flexibility and responsiveness, which may adversely affect our business, financial condition and results of operations.

Russian securities law may require us to list our securities on a stock exchange in Russia, which could impose additional administrative burdens on us and decrease the liquidity of trading in our shares on NASDAQ.

        Russian companies that list their securities on an exchange outside of Russia are required by law to first list their securities concurrently on a licensed Russian stock exchange and to offer their securities in Russia. Our parent company Yandex N.V., whose Class A shares will be listed on the NASDAQ Global Market, is not covered by such requirement, as it is incorporated outside Russia. The Russian securities regulator, the Federal Service for Financial Markets, has at various times officially emphasized that foreign issuers with substantial assets in Russia should undertake concurrent listings in Russia, and has proposed to change the securities regulations with the view to making such requirement mandatory. As a result, we can provide no assurance that we will not experience pressure to list our shares in Russia, which may impose additional administrative burdens on us and may result in a reduction of the liquidity of trading in our shares on the NASDAQ Global Market.

The pending presidential election in Russia creates a degree of political and commercial uncertainty, which may adversely affect our ability to implement our business plan in the near term.

        The next presidential election in Russia is scheduled for March 2012 and we anticipate that there may be a degree of uncertainty regarding political, regulatory, administrative and commercial developments until that time. The effects of changes in government policy, if any, cannot be predicted, but could harm our business.

Businesses in Russia, especially high-profile companies, may be subject to aggressive application of contradictory or ambiguous laws or regulations, or to politically motivated actions, which could materially adversely affect our business, financial condition and results of operations.

        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 high degree of discretion in Russia and have at times exercised their discretion in ways that may be perceived as selective or arbitrary, 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 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.

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        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. In 2008, for example, government officials publicly criticized transfer pricing arrangements used by a Russian-based company that is publicly traded in the United States, claiming that such arrangements constituted tax evasion. These claims resulted in a steep decline in that company's stock price. Government officials may apply 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.

        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 effect changes of control. Although we believe that our content neutrality 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 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.

Restrictions on foreign ownership imposed by Russian legislation may prevent a takeover of our company by a non-Russian party.

        In May 2008, the 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") came into force in Russia, which restricts foreign ownership of companies involved in certain strategically important activities in Russia. Although the internet is not an industry specifically covered by the Strategic Companies Law, companies that hold licenses to use encryption technologies are covered by this law. Our Yandex.Money subsidiary was recently granted encryption licenses and therefore this subsidiary is now covered by the Strategic Companies Law. As a result, our parent company, Yandex N.V., is likely covered by the Strategic Companies Law.

        Under the provisions of the Strategic Companies Law, the direct or indirect acquisition of more than 25% of the voting power of a strategically important company by a foreign state, foreign governmental organization, international organization or entity controlled by a foreign government, or international organization, or the acquisition of more than 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 companies that are controlled by a foreign state or a foreign government or international organization are prohibited from owning more than 50% of the voting power of a strategically important company. Moreover, the acquisition of 5% or more of the shares of a strategically important company triggers a notification requirement to the Federal Antimonopoly Service. Failure to obtain the required governmental approval prior to an acquisition would render the acquisition null and void.

        Because our parent company, which holds 100% of the shares of Yandex.Money, held such shares at the time that Yandex.Money became a strategically important company, we believe that our ownership of Yandex.Money is in compliance with the Strategic Companies Law. Given our ownership of Yandex.Money, however, our parent company is likely also subject to the Strategic Companies Law. If we are subject to the Strategic Companies Law, any non-Russian state, governmental organization, international organization or entity controlled by a non-Russian government international organization that seeks to acquire more than 25% of the voting power of our outstanding Class A and Class B shares (taken together) or any non-Russian party unaffiliated with any non-Russian state, governmental

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organization, international organization or entity controlled by a non-Russian government or international organization that seeks to acquire more than 50% of the voting power of our outstanding Class A and Class B shares (taken together) would need to obtain the requisite approval of the Russian government committee. Moreover, a non-Russian government entity would be prohibited from acquiring more than 50% of the voting power of our outstanding Class A and Class B shares (taken together).

        These restrictions on ownership of our shares would be in addition to the restrictions on ownership of our shares provided for in our articles of association. See "—Risk Related to this Offering and Ownership of our Class A Shares—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," "—Anti-takeover provisions in our articles of association and the shareholders agreement among our existing shareholders may prevent or delay change-of-control transactions," and "Description of Share Capital—Accumulation of Material Shareholdings in Our Company."

Businesses in Russia can be subject to aggressive actions 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.

Civil or military conflicts or material disruptions in the political relations between Russia and the other countries of the CIS may adversely affect investments in Russia, which may cause the market price of our Class A shares to decline.

        Political, ethnic, religious, historical and other differences have, on occasion, given rise to tensions and, in certain cases, military conflict between Russia and other countries of the CIS, and in regions of the Russian Federation, such as Chechnya. Moscow experienced terrorist attacks in 2010 and early 2011, for example, that were perceived as being politically motivated. In addition, the relationship between Russia and Ukraine has experienced extended periods of strain. Political tensions, military conflicts or other material disruptions in Russia or between Russia and other CIS countries can adversely affect prices of shares of companies operating in Russia and, as a result, may cause the market price of our Class A shares to decline.

The Russian banking and financial system 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 in 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.

        As a result, the banking sector remains subject to periodic instability. 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.

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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 aggressive 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 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 Russian tax system or unpredictable or unforeseen application of existing rules may materially adversely affect our business, financial condition and results of operations.

        There have been significant changes to the Russian taxation system in recent years as the authorities have gradually replaced legislation regulating the application of major taxes such as corporate income tax, VAT, corporate property tax and other taxes with new chapters of the Tax Code of the Russian Federation. Russian tax authorities have also been aggressive in their interpretation of tax laws and their many ambiguities, as well as in their enforcement and collection activities. Technical violations of contradictory laws and regulations, many of which are relatively new and have not been subject to extensive application or interpretation, can lead to penalties. High-profile companies can be particularly vulnerable to aggressive application of unclear requirements. Many companies must negotiate their tax bills with tax inspectors who may demand higher taxes than applicable law appears to provide. Our tax liability may become greater than the estimated amount that we have expensed to date and paid or accrued on our balance sheets. Any additional tax liability, as well as any unforeseen changes in Russian tax laws, could have a material adverse effect on our future results of operations, financial condition or cash flows in a particular period.

        The tax environment in Russia historically has been complicated by contradictions in Russian tax law. For example, tax laws are unclear with respect to the deductibility of certain expenses and, at times, we may have taken a position that may be considered aggressive by tax authorities, but that we consider to be in compliance with current law. This uncertainty could result in a greater than expected tax burden and potentially exposes us to significant fines and penalties and enforcement measures, despite our best efforts at compliance. Generally, 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. Tax audits are routinely undertaken at least every two years. The tax authorities have completed an audit of our principal Russian subsidiary for the years 2005-2007 and claimed that we owed an additional RUR 20 million in respect of tax underpayments, interest and penalties. We have paid an aggregate of RUR 14 million in a final resolution of these matters. A tax audit of our principal Russian subsidiary for the years 2008-2009 is currently underway. We expect to receive the results of this audit in the third quarter of this year.

        In October 2006, the Supreme Arbitration Court of the Russian Federation issued a ruling that introduced the concept of an "unjustified tax benefit," which is a benefit that may be disallowed for tax purposes. Specific examples cited by the court include benefits obtained under transactions lacking a business purpose (i.e., when the only purpose of a deal or structure is to derive tax benefits). The tax authorities are actively seeking to apply this concept when challenging tax positions taken by taxpayers. Although the intention of the ruling was to combat tax abuse, in practice there is no assurance that the tax authorities will not seek to apply this concept in a broader sense than may have been intended by the court. In addition, the tax authorities and the courts have indicated a willingness to interpret broadly the application of criminal responsibility for tax violations.

        The Russian tax system imposes additional burdens and costs on our operations in Russia, and complicates our tax planning and related business decisions. These factors raise the risk of a sudden

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imposition of arbitrary or onerous taxes on our operations in Russia or fines, penalties and enforcement measures. This may materially adversely affect our business, financial condition and results of operations.

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 accordance with Russian legislation, dividends paid by a Russian entity to a nonresident shareholder that is a legal entity are subject to Russian withholding tax at the rate of 15%. The Netherlands-Russia tax treaty generally reduces that rate to 5% for corporate shareholders that are tax resident in the Netherlands, provided that they do not have a permanent establishment in Russia and that certain other conditions, which we believe we satisfy, are met.

        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%. Prior to our corporate reorganization in 2007, our parent company was incorporated in Cyprus and dividends were paid to that company in reliance on similar provisions under the Cyprus-Russia tax treaty.

        Our Russian operating subsidiaries have paid dividends to our parent company in reliance on the provisions of both the Netherlands-Russia tax treaty and the Cyprus-Russia tax treaty. Russian tax rules, however, 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 are currently under review and may change, thus triggering changes in taxation of dividends from our Russian subsidiaries to our parent company in the future.

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 our Dutch parent company. We currently only provide for dividend withholding taxes on 50% of the current year profit of our principal Russian operating subsidiary before we decide on the actual current year distribution because our inter-company dividend policy stipulates distribution of up to 50% of the current net profit for the year to our Dutch parent company. We currently deem any earnings remaining after our annual distribution to be permanently reinvested by our principal Russian operating subsidiary outside of the Netherlands and, accordingly, we have not recorded a deferred tax liability on these unremitted earnings. 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 March 31, 2011, the cumulative amount of unremitted earnings in respect of which dividend withholding taxes have not been provided is RUR 7.80 billion. We expect that the applicable withholding tax rate is 5% and estimate that the amount of the unrecognized deferred tax liability related to these unremitted earnings was RUR 390 million as of March 31, 2011. 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

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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 without creating a deemed employer-employee relationship. Many of our Yandex ad network partners are individuals who own and operate their own websites. We have contractual relationships with third parties, including advertising agencies, who act as aggregators and that make payments to individual Yandex ad network partners for the fees to which they are entitled in connection with the ads we serve on their websites. In the event that an aggregator fails to make any required tax withholding or otherwise comply with applicable laws in respect of such payments, the authorities might seek to hold us liable. In addition, because of ambiguities in the law, a Russian court or agency might elect to disregard these aggregators and construe our indirect payments to any such individual as creating an employer-employee relationship between us and that individual, with associated tax obligations. If Russian law were interpreted in such a way, and if we were not able to develop a method of paying individual partners without triggering this law, we would most likely limit partnership in the Yandex ad network to legal entities and businesses to reduce our exposure to potential liability. This would result in fewer partners in the Yandex ad network, and may adversely affect our business, financial condition and results of operations.

Risks Related to this Offering and Ownership of our Class A Shares

There has been no public market for our Class A shares prior to this offering, and you may not be able to resell our Class A shares at or above the price you paid, or at all.

        Prior to this initial public offering, there has been no public market for our Class A shares. Our Class A shares have been approved for listing on the NASDAQ Global Market. If an active trading market for our Class A shares does not develop after this offering, the market price and liquidity of our Class A shares will be materially and adversely affected.

        The initial public offering price for our Class A shares will be determined by negotiations between us and the underwriters and may bear no relationship to the market price for our Class A shares after the initial public offering. We cannot assure you that an active trading market for our Class A shares will develop or that the market price of our Class A shares will not decline below the initial public offering price.

The price of our Class A shares may be highly volatile and market fluctuations specific to high-growth technology companies 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.

        The market for technology and other growth companies has experienced severe price and volume fluctuations that have often been disproportionate to the operating performance of those companies. Such fluctuations may be even more pronounced in the trading market shortly following listing. These broad 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 following this offering is therefore likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include:

    quarterly variations in our results of operations or those of our competitors;

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    announcements of technological innovations or new services and media properties by us or our competitors;

    the emergence of new advertising channels in which we are unable to compete effectively;

    changes in governmental regulations;

    disruption to our operations or those of our partners;

    our ability to develop and launch new and enhanced services on a timely basis;

    commencement of, or our involvement in, litigation;

    any major change in our directors or management;

    changes in earnings estimates or recommendations by securities analysts;

    the operating and stock price performance of other companies that investors may deem comparable to us; or

    general economic conditions and slow or negative growth of related markets.

        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 share options.

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

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

        Our Class B shares have ten votes per share and our Class A shares, which are the shares being sold in this offering, have one vote per share. We anticipate that, following this offering, our existing shareholders will together hold all of our outstanding Class B shares, representing 93.7% of the voting power of our outstanding shares. Furthermore, our founders, directors and senior management (and their affiliates) will together own 60.8% of our outstanding Class B shares and 12.9% of our outstanding Class A Shares, representing 57.8% of the voting power of our outstanding shares. In particular, following this offering, our two founders, Mr. Volozh and Mr. Segalovich, will directly or indirectly control 25.5% of our outstanding Class B shares and none of our outstanding Class A shares, representing 23.9% of the voting power of our outstanding shares. For the foreseeable future, therefore, our existing shareholders 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 control 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 the ability of the parties to the shareholders agreement to vote in favor of amendments of the anti-takeover provisions of our articles of association. See "Related-Party Transactions—Shareholders Agreement." This concentrated control will limit 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. See "Description of Share Capital—Priority Share" and "—Accumulation of Material Shareholdings in our Company."

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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 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 existing 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:

    the staggered three-year terms of our directors, as a result of which only one-third of our directors will be subject to election in any one year;

    a provision that our directors may only be removed by a two-thirds majority of votes cast representing at least 50% of our outstanding share capital;

    the authorization of a class of preference shares that may be issued by our board of directors in such a manner as to dilute the interest of any potential acquirer;

    requirements that certain matters, including an amendment of our articles of association, may only be brought to our shareholders for a vote upon a proposal by our board of directors;

    minimum shareholding thresholds, based on par value, for shareholders to call general meetings of our shareholders or to add items to the agenda for those meetings, which will be very difficult for Class A shareholders to meet given our multiple class share structure; and

    supermajority requirements for shareholder approval of certain significant corporate actions, including the legal merger or demerger of our company and the amendment of our articles of association.

        In addition, the provisions of the shareholders agreement described above could have the effect of preventing or delaying a takeover of our company. See "Related-Party Transactions—Shareholders Agreement."

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        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 are not listing our shares, and do not expect to list our shares, on a regulated market within the European Union, and therefore these rules will not apply to any public offer for our Class A shares.

We expect that only a relatively small percentage of our ordinary shares will be publicly traded following this offering, which may limit the liquidity of your investment and may have a material adverse effect on the price of our Class A shares.

        After this offering, 109,590,124 of our ordinary shares, representing 34.1% by number of our outstanding ordinary shares and 28.1% by voting power, will be held by parties other than our founders, directors, senior management, existing shareholders holding 5% or more of our ordinary shares (by number or by voting power), and their respective affiliates. As a result, we expect that only a relatively small number of our ordinary shares will be actively traded in the public market following this offering. Reduced liquidity may have a material adverse effect on the price of our Class A shares.

You will not be able to trade our Class A shares on any exchange outside the United States.

        Our Class A shares will be listed only in the United States on the NASDAQ Global Market and we have no plans to list our Class A shares in any other jurisdiction. As a result, a holder of our Class A shares outside the United States may not be able to effect transactions in our Class A shares as readily as the holder may if our securities were listed on an exchange in that holder's home jurisdiction.

The sale of a substantial number of our Class A shares following this offering may cause the market price of our Class A shares to decline.

        Sales of a substantial number of shares in the public market may occur at any time after the expiration of the lock-up agreements described in the "Underwriting" section of this prospectus. Our sale or the resale by our shareholders of shares (or a market expectation of such sales) after this offering may cause the market price of our Class A shares to decline. After this offering, we will have outstanding 129,200,543 Class A shares and 192,046,915 Class B shares (which are freely convertible into Class A shares at any time). Of these, the 52,174,088 Class A shares sold in this offering will be freely transferable without restriction. The remaining 77,026,455 Class A shares and all the Class B shares, or 83.8% of our outstanding shares by number after this offering, are currently restricted as a result of securities laws or lock-up agreements but will be able to be sold, subject to any applicable volume limitations under U.S. federal securities laws with respect to affiliate sales, in the near future as set forth in "Shares Eligible for Future Sale" and "Underwriting" below.

We may apply the proceeds we receive from this offering to uses that do not improve our results of operations or increase the value of your investment.

        We anticipate that we will use the net proceeds to us from this offering for general corporate purposes, including investments in technology infrastructure. We may also use a portion of the net proceeds for the acquisition of, or investments in, technologies, teams or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or make any such investments.

        Pending such uses, we may be limited in the types of investments we can make with the proceeds in order to comply with the requirements of the U.S. Investment Company Act of 1940. As a result, these proceeds could be applied in ways that do not improve our results of operations or increase the value of your investment.

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You will experience immediate and substantial dilution in the net tangible book value of shares purchased.

        The initial public offering price per share will be substantially higher than the net tangible book value per share prior to the offering. Consequently, when you purchase shares in the offering at the assumed initial public offering price, you will incur immediate dilution of $18.99 per share. See "Dilution."

Investors who purchase securities outside of the United States should not rely on certain remedies under U.S. securities laws.

        Shares initially offered and sold outside the United States are not being registered under the Securities Act for the purpose of sales outside the United States. Investors who purchase shares offered and sold outside the United States should therefore not rely on the availability of remedies under U.S. securities laws which flow from the registration of the offering in the United States under the Securities Act.

We intend to 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 will 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 Market, we are permitted in certain cases to follow Dutch corporate governance practices instead of the corresponding requirements of the NASDAQ Marketplace Rules. A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements must submit to NASDAQ in advance a written statement from an independent counsel in such issuer's home country certifying that the issuer's practices are not prohibited by the home country's laws. In addition, a foreign private issuer must disclose in its annual reports filed with the Securities and Exchange Commission each such requirement that it does not follow and describe the home country practice followed instead of any such requirement. We intend to 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, rather than the corresponding domestic U.S. corporate governance practices. 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 intend to 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.

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 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). We do not comply with all the provisions of the DCGC. See "Description of Share Capital—Corporate Governance." 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.

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A legislative proposal is pending in the Netherlands to introduce a one-tier board structure into Dutch law. If introduced, we may have to change certain board procedures and our board composition.

        We currently have a one-tier board with executives and non-executives. Though a one-tier board is not uncommon for Dutch companies, there is no statutory basis for this. A legislative proposal is pending in the Netherlands to introduce into Dutch law a one-tier board structure. If introduced, we may have to change our board composition to reflect restrictions contained in the legislative proposals on the maximum number of board memberships an individual may hold and a requirement that 30% of the members of a company's board of directors must be women.

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 our estimated gross income and average value of our gross assets (taking into account the assumed initial public offering price of our shares in this offering and the expected price of our shares following the offering) and the nature of our business, we do not expect to be considered a "passive foreign investment company," or PFIC, for U.S. federal income tax for the 2011 tax year or in the foreseeable future. However, our status in any taxable year will depend on our assets and activities in each year, and because this is a factual determination made annually after the end of each taxable year, there can be no assurance that we will not be considered a PFIC for the current taxable year or any future taxable year. The market value of our assets may be determined in large part by reference to the market price of our Class A shares, which is likely to fluctuate after the offering (and may fluctuate considerably given that market prices of technology companies have been especially volatile). If we were to be treated as a PFIC for any taxable year during which a U.S. holder held our Class A shares, however, 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."

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 some of our directors and most of our 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 as a matter of court practice 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. See "Enforceability of Civil Liabilities."

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 rights of our shareholders and 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

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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. Dutch law does not have a regulatory regime for U.S.-style proxy solicitations and, even though Dutch law accommodates voting by proxy, the solicitation of proxies is not a widely used business practice in the Netherlands.

        In addition, the rights of holders of shares and many of the rights of shareholders as they relate to, for example, the exercise of shareholder rights, 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. See "Description of Share Capital—Differences in Corporate Law."

You may not be able to participate in rights offerings and may experience dilution of your holdings as a result.

        We may from time to time distribute rights to our shareholders, including rights to acquire our securities. We will not offer those rights to U.S. shareholders unless both the rights and the underlying securities to be distributed to U.S. shareholders are either registered under the Securities Act, or exempt from registration under the Securities Act with respect to all holders of shares. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions from registration under the Securities Act. Accordingly, holders of our Class A shares may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.

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FORWARD-LOOKING STATEMENTS

        This prospectus 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 prospectus may include statements about:

    the expected growth of the internet search market and the number of internet and broadband users in the countries in which we operate;

    competition in the internet search market in the countries in which we operate;

    our anticipated growth and investment strategies;

    our future business development, results of operations and financial condition;

    expected changes in our margins and certain cost or expense items as a percentage of our revenues;

    our ability to attract and retain users, advertisers and partners; and

    future advertising supply and demand dynamics.

        The forward-looking statements included in this prospectus 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 "Risk Factors" and elsewhere in this prospectus.

        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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PRESENTATION OF MARKET DATA AND OTHER INFORMATION

        This prospectus includes market data reported by a number of third-party sources:

Economic Data

    Russian Federal State Statistics Service (Rosstat). Economic statistics from Rosstat included in this prospectus are extracted from an online database made available by Rosstat on its website (http://www.gks.ru) as of February 22, 2011.

    Euromonitor International. Economic statistics reported by Euromonitor International included in this prospectus are extracted from a report by Euromonitor International and are dated January 2011.

Internet Search, Internet Usage and Broadband Access

    comScore. comScore provides syndicated and custom solutions in online audience measurement, e-commerce, advertising, search, video and mobile and offers dedicated analysts with digital marketing and vertical-specific industry expertise. Data from comScore included in this prospectus are extracted from a report by comScore dated April 2011.

    Liveinternet.ru. This market research firm reports internet usage data in Russia based on counters installed on participating websites. With respect to Liveinternet.ru data, we use the term "market share" and similar expressions to mean visits by users with Russian internet protocol addresses originating from a particular search engine as a percentage of all visits originating from search engines to websites with Russian domain names. Data from Liveinternet.ru included in this prospectus are extracted from an online database made available by Liveinternet.ru as of April 27, 2011.

    TNS Global. TNS uses software meters to collect data from a panel of Russians aged 12-54 regarding visits to participating websites, and excludes google.ru and google.com, which do not participate. The TNS panel is designed to represent only internet traffic generated from users in Russia (and therefore effectively ignores traffic to Russian websites that originates outside Russia). Data from TNS included in this prospectus are extracted from a report provided by TNS dated March 2011.

    Euromonitor International. Euromonitor International defines internet users as those using the internet from any device (including mobile phones) in the past 12 months and generally covers users between the age of 15-74. Internet user statistics provided by Euromonitor International included in this prospectus are extracted from a report by Euromonitor International dated December 2010.

    Public Opinion Foundation of Russia (FOM). FOM measures internet penetration in Russia as the number of internet users aged 18 and older as a percentage of the total population aged 18 and older. Data from FOM included in this prospectus are extracted from a report commissioned by us, and published online by FOM on March 16, 2011.

    GroupM. Data by GroupM included in this prospectus are contained in a survey by GroupM dated Summer 2010.

        Data on internet users and penetration from the sources listed above may not be directly comparable due to differing metrics and measurement methods.

Mobile Phone Usage and Mobile Advertising

    ComNews. Data reported by ComNews included in this prospectus are extracted from a report by ComNews dated May 2010.

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    IDC. Mobile internet subscriber data reported by IDC included in this prospects are extracted from a report by IDC dated April 2011.

    Starcom MediaVest. Mobile advertising data reported by Starcom MediaVest are extracted from a report by Starcom MediaVest dated August 2010; provided to eMarketer, August 2010.

Advertising Expenditures

    ZenithOptimedia. This market research firm measures online and offline advertising spending worldwide, based on the historical advertising expenditure figures from the source or sources in each country that the firm judges to be the most reliable. ZenithOptimedia data on advertising spend are generally net of agency discounts and commissions, to the extent possible in each country. The figures include agency commissions and VAT, and exclude production costs and discounts. Data from ZenithOptimedia included in this prospectus are extracted from a report by ZenithOptimedia dated April 2011.

    GroupM. Data reported by GroupM for Russian text-based and display advertising revenues and forecasts included in this prospectus are extracted from a report by GroupM dated Summer 2010.

    AKAR. Data on advertising expenditures in Russia from the Russian Association of Communications Agencies (AKAR) are extracted from the AKAR website as of April 27, 2011.

eCommerce Market

    IDC. Data reported by IDC on the business-to-business and business-to-consumer eCommerce market included in this prospectus are provided by IDC in a report dated April 2011.

Financial Statements

        Currently, we present our financial statements in Russian rubles. Historically, our financial statements were presented in U.S. dollars. Our consolidated balance sheets as of December 31, 2006 and 2007 and consolidated financial statements for the years ended December 31, 2006 and 2007 were originally presented in U.S. dollars and were audited. When we re-presented these financial statements to reflect a change in our reporting currency to Russian rubles, we did not have them re-audited.

Other Information

        Unless otherwise indicated:

    the terms "we," "us," "our" and "Yandex" refer to Yandex N.V. (and for periods prior to the corporate reorganization of our group in 2007, Yandex Technologies Limited, a Cypriot company and the former ultimate holding company of our group), together with its direct and indirect subsidiaries, and references to "our company" refer to Yandex N.V. (or Yandex Technologies Limited, as the case may be) alone, unless the context otherwise requires;

    "shares" refer to our Class A, Class B and/or Class C ordinary shares;

    all references to a percentage of shares outstanding, whether by number or by voting power, excludes any Class C ordinary shares outstanding from time to time because those shares are held only by our conversion foundation and will be repurchased by us promptly upon issuance and cancelled at our next general meeting of shareholders. See "Description of Share Capital—Ordinary Shares—Transfer and Conversion of Ordinary Shares;"

    information in this prospectus assumes that the underwriters do not exercise their over-allotment option to purchase an aggregate of up to an additional 5,217,405 Class A shares from us and the selling shareholders;

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    references to "U.S. dollars," "dollars" and "$" are to the legal currency of the United States; references to "euro" or "€" are to the legal currency of the European Monetary Union; and references to "RUR" or "ruble" are to the legal currency of the Russian Federation; and

    all references to a fiscal year refer to our fiscal year ended or ending March 31 of that year.

        This prospectus contains some of our registered and unregistered trademarks and service marks, including "Yandex," "Yandex.Money" and "Yandex.Narod." Certain other trademarks and service marks appearing in this prospectus are the property of their respective holders.

        Certain financial statement ruble amounts have been translated, solely for the convenience of the reader, into U.S. dollars at a rate of RUR 28.4290 to $1.00, the official exchange rate quoted as of March 31, 2011, 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. On May 5, 2011, the exchange rate was RUR 27.3675 to $1.00.

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USE OF PROCEEDS

        We estimate that we will receive net proceeds from this offering of $305.5 million, or $336.4 million if the underwriters exercise their option to purchase additional Class A shares in full, based upon an assumed initial public offering price of $21.00 per Class A share (the midpoint of the estimated price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and offering expenses payable by us. We will not receive any of the proceeds from sales of Class A shares by the selling shareholders.

        A $1.00 increase (decrease) in the assumed initial public offering price of $21.00 per Class A share would increase (decrease) the net proceeds to us from this offering by approximately $14.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of Class A shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $20.1 million, assuming the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions and offering expenses payable by us.

        We are conducting this offering in order to provide liquidity for our existing shareholders, to enhance the profile of our company through a public market listing, and to raise funds that will increase our financial flexibility. We intend to use the net proceeds to us from this offering for general corporate purposes, including investments in technology infrastructure, particularly new servers and data centers. We may also use a portion of the net proceeds for the acquisition of, or investments in, technologies, teams or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or make any such investments. We have no specific plans or commitments with respect to the proceeds to us of this offering, and therefore are unable to quantify the allocation of such proceeds among various potential uses at this time. Our management will retain broad discretion in the allocation and use of the net proceeds to us of this offering. Pending such decisions, we intend to invest such proceeds in investment-grade, interest-bearing securities or bank deposits.

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DIVIDEND POLICY

        We do not have any present plan to pay cash dividends on our shares in the near term. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

        We have paid dividends on our shares in the past to provide some liquidity to our founding shareholders. Since January 1, 2006, we declared cash dividends in U.S. dollars of: $5.0 million in the aggregate, or $0.02 per share, on May 12, 2006; $10.0 million in the aggregate, or $0.03 per share, on November 21, 2006; $10.0 million in the aggregate, or $0.03 per share, on December 12, 2007; $19.5 million in the aggregate, or $0.06 per share, on November 6, 2008; and $30.0 million in the aggregate, or $0.10 per share, on July 26, 2010. All dividends were paid in full shortly after their declaration.

        If and when we pay dividends in the future, they will be payable on a pari passu basis on the outstanding Class A and Class B shares and the priority share. Although our Class C shares are technically entitled to a maximum dividend of €0.01 per share when we declare dividends on our Class A and Class B shares, we intend to repurchase all Class C shares issued upon conversion of our Class B shares promptly following their issuance such that no dividends would be payable on our Class C shares.

        Cash dividends on our shares, if any, will be paid in U.S. dollars. See "Description of Share Capital—Ordinary Shares—Dividends."

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CAPITALIZATION

        The following table sets forth our cash, cash equivalents and term deposits and capitalization as of March 31, 2011:

    on an actual basis;

    on a pro forma basis to give effect to

    the sale by us of 15,400,000 Class A shares in this offering at an assumed initial public offering price of $21.00 per Class A share (the midpoint of the estimated price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and offering expenses payable by us;

    the exercise of options to purchase 2,031,940 Class A shares in connection with the offering by certain selling shareholders and the receipt by us of proceeds of $4,548,538 from the exercise of these options; and

    the conversion of 81,717,389 Class B shares into Class A shares for purposes of sale by certain selling shareholders in this offering or otherwise in connection with the closing of this offering.

        This table should be read with our consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations."

 
  As of March 31, 2011
 
  Actual   Pro Forma
 
  (in millions, except share and
per share data)
 
  RUR   $   RUR   $

Cash and cash equivalents

    3,154     110.9   11,970   421.0

Term deposits (current and non-current)

    3,574     125.7   3,574   125.7
                 

Shareholders' equity:

                   
 

Ordinary shares:

                   
   

Class A shares, €0.01 par value per share, 4,539,525,900 shares authorized and 30,058,714 shares issued and 30,051,214 shares outstanding, actual; 2,000,000,000 shares authorized and 129,200,543 shares issued and outstanding, pro forma; Class B shares, €0.10 par value per share, 302,635,060 shares authorized and 273,764,304 shares issued and outstanding, actual; 273,764,304 shares authorized and 192,046,915 shares issued and outstanding, pro forma; Class C shares, €0.09 par value per share, 302,635,060 shares authorized and 2,299,141 shares issued, actual; 276,063,445 shares authorized and 84,016,530 shares issued, pro forma

    972     34.2   695   24.4
 

Priority share, €1 par value per share, 1 share authorized and outstanding, actual; 1 share authorized and outstanding, pro forma

           
 

Preference shares, €0.01 par value per share, no shares authorized or outstanding, actual; 2,000,000,001 shares authorized and no shares outstanding, pro forma

           

Additional paid-in capital

    529     18.6   9,688   340.8

Accumulated other comprehensive income

    13     0.5   13   0.5

Retained earnings

    8,848     311.2   8,782   308.9
                 
 

Total shareholders' equity/capitalization

    10,362     364.5   19,178   674.6
                 

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The table above excludes:

    15,648,342 shares issuable upon the exercise of options outstanding as of the date of this prospectus at a weighted average exercise price of $3.71 per share. These consist of options that may be exercised for an aggregate of either 7,989,036 Class A or Class B shares (depending on whether the option holders elect to sell or hold their shares), and options that may be exercised for an aggregate of 7,659,306 Class A shares only. See "Management—Compensation—Share Options;"

    831,000 Class A shares issuable upon the exercise of options that we will grant on the closing of this offering to employees and directors at an exercise price per share equal to the offering price; and

    16,015,003 Class A shares reserved for future issuance (but not currently outstanding) under our Amended and Restated 2007 Share Option Plan.

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DILUTION

        The net tangible book value of Yandex as of March 31, 2011, was RUR 9,581 million ($337.0 million), or RUR 31.54 per share ($1.11 per share). Net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of Class A and Class B shares outstanding as of March 31, 2011.

        After giving effect to the sale by us of 15,400,000 Class A shares in this offering at an assumed initial public offering price of $21.00 per Class A share (the midpoint of the estimated price range on the cover of this prospectus), the exercise of options to purchase an aggregate of 2,031,940 Class A shares by certain selling shareholders who will sell such shares in this offering and the receipt by us of an aggregate of $4,548,538 as payment of the exercise price in connection with such option exercises, and after deducting estimated underwriting discounts and commissions and offering expenses payable by us, our adjusted net tangible book value as of March 31, 2011, would have been $647.1 million, or $2.01 per share. This amount represents an immediate increase in net tangible book value of $0.90 per share to our existing shareholders and an immediate dilution in net tangible book value of $18.99 per share to new investors purchasing Class A shares in this offering at the assumed initial public offering price. We determine dilution by subtracting the adjusted net tangible book value per share after this offering from the amount of cash that a new investor paid for a Class A share. The following table illustrates this dilution on a per share basis:

Assumed initial public offering price per Class A share

        $ 21.00  
 

Net tangible book value per share as of March 31, 2011

  $ 1.11        
 

Increase per share attributable to new investors in this offering

    0.90        
             

Pro forma net tangible book value per share as of March 31, 2011 after giving effect to this offering

          2.01  
             

Dilution per Class A share to new investors

        $ 18.99  
             

        A $1.00 increase (decrease) in the assumed initial public offering price of $21.00 per Class A share would increase (decrease) the pro forma net tangible book value, as adjusted to give effect to this offering, by $0.05 per share and increase (decrease) the dilution to new investors by $0.05 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and offering expenses payable by us.

        If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value per share of our shares, as adjusted to give effect to this offering, would be $2.10 per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $18.90 per Class A share.

        The table below summarizes as of March 31, 2011, the differences between the number of shares purchased from us, the total consideration paid to us in cash and the average price per share that existing shareholders and new investors paid. The calculations below are based on an assumed initial public offering price of $21.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and offering expenses.

 
   
   
  Total
Consideration
   
 
 
  Shares Purchased    
 
 
  Average
Price
Per Share
 
 
  Number   Percent   Amount   Percent  

Existing shareholders

    305,847,458     95.21 % $ 11,758,436     3.51 % $ 0.04  

New investors

    15,400,000     4.79     323,400,000     96.49     21.00  
                         
 

Total

    321,247,458     100.0 % $ 335,158,436     100.0 %      
                         

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        The total number of shares reflected in the discussion and tables above is based on 30,051,214 Class A shares and 273,764,304 Class B shares outstanding as of March 31, 2011. The discussion and tables above assume no exercise of any outstanding share options other than options to purchase 2,031,940 Class A shares to be exercised in connection with the offering by certain selling shareholders at a weighted average exercise price of $2.24 per share, which shares will be sold in this offering. Excluding those options, as of the date of this prospectus, there are (1) 15,648,342 shares issuable upon exercise of outstanding options at a weighted average exercise price of $3.71 per share, 7,989,036 of which may be exercised to purchase either Class A or Class B shares and 7,659,306 of which can only be exercised to purchase Class A shares and (2) 831,000 Class A shares issuable upon the exercise of options that we will grant on the closing of this offering to employees and directors at an exercise price per share equal to the offering price. Based upon the shares outstanding upon the closing of this offering, and the number of shares issuable upon exercise of outstanding options at the closing of this offering, there are 16,015,003 Class A shares available for future issuance upon the exercise of future grants under our Amended and Restated 2007 Share Option Plan. To the extent that any of these options are exercised, there will be further dilution to new investors.

        Sales by the selling shareholders in this offering will cause the number of shares held by existing shareholders to be reduced to 269,073,370 shares, or 83.8% of the total number (97.5% by voting power) of shares outstanding after this offering, and will increase the number of shares held by new investors to 52,174,088 shares, or 16.2% of the total number (2.6% by voting power) of shares outstanding after this offering. In addition, if the underwriters' over-allotment option is exercised in full, the number of shares held by the existing shareholders after this offering would be reduced to 265,599,158 shares or approximately 82.2% of the total number (96.4% by voting power) of shares outstanding after this offering, and the number of shares held by new investors would increase to 57,391,493 shares, or approximately 17.8% of the total number (3.6% by voting power) of shares outstanding after this offering.

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SELECTED CONSOLIDATED FINANCIAL DATA

        The selected consolidated statements of income data for the years ended December 31, 2008, 2009 and 2010 and the selected consolidated balance sheet data as of December 31, 2009 and 2010 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The selected consolidated balance sheet data as of December 31, 2008 are derived from our audited consolidated financial statements that are not included in this prospectus. The selected consolidated statements of income data for the years ended December 31, 2006 and 2007 and the selected consolidated balance sheet data as of December 31, 2006 and 2007 are derived from our unaudited consolidated financial statements, presented in Russian rubles, that are not included in this prospectus. Those consolidated financial statements were originally presented in U.S. dollars and audited. When we re-presented those financial statements in Russian rubles, we did not have them re-audited.

        Ruble amounts have been translated into U.S. dollars at a rate of RUR 28.4290 to $1.00, the official exchange rate quoted as of March 31, 2011 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 May 5, 2011, the exchange rate was RUR 27.3675 to $1.00.

        The selected consolidated statements of income data for the three months ended March 31, 2010 and 2011 and the selected consolidated balance sheet data as of March 31, 2011 are derived from our unaudited condensed consolidated financial statements appearing elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared using the same accounting principles and on the same basis as the year-end financial statements and include, in the opinion of management, all adjustments that management considers necessary for the fair presentation of the financial information set forth in those statements.

        You should read the following selected consolidated financial data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes appearing elsewhere in this prospectus. The selected consolidated financial data as of each date and for each period presented are prepared in accordance with U.S. GAAP. These historic financial results are not necessarily indicative of the results to be expected in any future period.

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  Year ended December 31,   Three months ended March 31,  
 
  2006   2007   2008   2009   2010   2010   2011  
 
  RUR
  RUR
  RUR
  RUR
  RUR
  $
  RUR
  RUR
  $
 
 
  (in millions, except share and per share data)
 

Consolidated statements of income data:

                                                       

Revenues:

    1,974     4,249     7,649     8,729     12,500     439.7     2,355     3,894     137.0  

Operating costs and expenses:

                                                       
 

Cost of revenues(1)

    165     704     1,701     2,086     2,585     90.9     539     894     31.4  
 

Product development(1)

    217     503     1,013     1,619     2,073     72.9     486     723     25.5  
 

Sales, general and administrative(1)

    416     695     1,250     1,474     1,838     64.7     372     628     22.1  
 

Depreciation and amortization

    114     295     600     912     1,181     41.5     259     377     13.3  
                                       

Total operating costs and expenses

    912     2,197     4,564     6,091     7,677     270.0     1,656     2,622     92.3  

Income from operations

   
1,062
   
2,052
   
3,085
   
2,638
   
4,823
   
169.7
   
699
   
1,272
   
44.7
 
 

Interest income

    18     31     86     67     156     5.5     28     34     1.2  
 

Other income/(expense), net(2)

    19     (4 )   208     (23 )   24     0.8     (57 )   (254 )   (8.9 )
                                       

Net income before income taxes

    1,099     2,079     3,379     2,682     5,003     176.0     670     1,052     37.0  

Provision for income taxes

   
288
   
559
   
947
   
672
   
1,186
   
41.7
   
163
   
232
   
8.2
 
                                       

Net income

    811     1,520     2,432     2,010     3,817     134.3     507     820     28.8  
                                       

Net income per Class A and Class B share:

                                                       
 

Basic

    2.69     5.03     8.04     6.63     12.56     0.44     1.67     2.70     0.09  
                                       
 

Diluted

    2.68     4.99     7.93     6.52     12.37     0.44     1.65     2.60     0.09  
                                       

Weighted average number of ordinary shares outstanding:

                                                       
 

Basic

    301,616,756     302,188,236     302,489,809     303,109,083     303,817,388     303,817,388     303,815,518     303,815,518     303,815,518  
 

Diluted

    303,088,016     304,676,596     306,893,587     308,156,196     308,580,600     308,580,600     306,964,554     315,230,574     315,230,574  

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

   
   
   
   
   
   
   
   
   
   
 
 

Cost of revenues

    2     2     6     10     16     0.6     4     6     0.2  
 

Product development

    11     9     42     60     87     3.1     18     32     1.1  
 

Sales, general and administrative

    11     26     92     139     57     2.0     11     32     1.1  
(2)
Other income/(expense) primarily comprises foreign exchange gains and losses generally resulting from changes in the value of the U.S. dollar as compared to 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 income statement. In 2008, other income includes RUR 65 million of foreign exchange gains arising from the appreciation of the U.S. dollar as compared to the Russian ruble principally in the fourth quarter of that year. In contrast, in the three months ended March 31, 2011, we recorded as other expense RUR 254 million in foreign exchange losses arising from the material decline in the value of the U.S. dollar as compared to the Russian ruble during that period. Although the U.S. dollar value of our U.S. dollar-denominated cash, cash equivalents and term deposits was not impacted by these currency fluctuations, they resulted in upward and downward re-valuations, respectively, of the ruble equivalent of these U.S. dollar-denominated monetary assets. Other income/(expense) also includes other non-operating gains and losses and, in 2008, includes RUR 120 million of other income related to a cash penalty paid to us in connection with the termination of a preliminary lease agreement.

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  As of December 31,   As of
March 31,
 
 
  2006   2007   2008   2009   2010   2011  
 
  RUR
  RUR
  RUR
  RUR
  RUR
  $
  RUR
  $
 
 
  (in millions)
 

Consolidated balance sheet data:

                                                 

Cash and cash equivalents(1)

    90     596     2,258     2,405     3,371     118.6     3,154     110.9  

Term deposits (current and non-current)

    313     312     290     1,897     3,574     125.7     3,574     125.7  

Total assets

    1,126     3,154     5,977     8,446     12,617     443.8     13,587     477.9  

Total current liabilities

    286     936     1,610     1,850     2,937     103.3     3,161     111.1  

Total non-current liabilities

    12     50     48     60     65     2.3     64     2.3  

Total shareholders' equity

    828     2,168     4,319     6,536     9,615     338.2     10,362     364.5  

(1)
As of December 31, 2006, 2007, 2008, 2009 and 2010 and March 31, 2011, our cash and cash equivalents, included nil, RUR 268 million, RUR 427 million, RUR 563 million, RUR 826 million ($29.1 million) and RUR 879 million ($30.9 million), respectively, of cash held by us (a) on behalf of our Yandex.Money account holders and (b) to settle online payments in the process of being cleared by Yandex.Money.

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 and interim results of operations in U.S. dollars for the convenience of the reader, converted at the official exchange rate quoted by the Central Bank of the Russian Federation. Unless otherwise noted, all translations from RUR to U.S. dollars and from U.S. dollars to RUR in this prospectus were made at a rate of RUR 28.4290 to $1.00, the official exchange rate quoted as of March 31, 2011. On May 5, 2011, the exchange rate was RUR 27.3675 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.

        The following table presents information on the exchange rates between RUR and the U.S. dollar for the periods indicated:

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

2006

    26.33     27.19     28.48     26.18  

2007

    24.55     25.58     26.58     24.26  

2008

    29.38     24.86     29.38     23.13  

2009

    30.24     31.72     36.43     28.67  

2010

    30.48     30.37     31.78     28.93  

2011 (through May 5)

    27.37     28.92     30.63     27.33  

January 2011

   
29.67
   
30.09
   
30.63
   
29.67
 

February 2011

    28.94     29.29     29.80     28.94  

March 2011

    28.43     28.43     28.90     28.16  

April 2011

    27.50     28.11     28.52     27.50  

May 2011 (through May 5)

    27.37     27.44     27.50     27.33  

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

        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 prospectus and our consolidated financial statements and related notes appearing elsewhere in this prospectus. 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 prospectus.

Overview

        We are the leading internet company in Russia, operating the most popular search engine and the most visited website in Russia. Our principal constituencies are:

    Users.  We provide our users with advanced search capabilities and an extensive range of online services that enable them to find relevant, objective information quickly and easily, and communicate and connect over the internet.

    Advertisers.  Our online advertising platform allows advertisers to reach a large audience of users in their markets and deliver cost-effective text-based and display advertising. With Yandex.Direct, our auction-based advertising platform, advertisers can promote their products and services through relevant ads targeted to a particular user query, the content of a website or webpage being viewed, or user behavior or characteristics.

    Yandex ad network partners.  We have relationships with a large number of third-party websites which we refer to as the Yandex ad network. In addition to serving ads on our own websites, we also serve ads on our network partners' websites and share the fees generated by these ads with our partners, providing an important revenue stream for them.

        Our yandex.ru website first began generating revenue in 1998. We became profitable in 2003 and have been profitable every year since then. We operate as a single business segment.

        Advertising revenues accounted for 97.9%, 97.0% and 97.5% of our total revenues in 2008, 2009 and 2010, respectively, and for 97.1% and 97.6% of our total revenues in the three months ended March 31, 2010 and 2011, respectively. Our advertising revenues comprise 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 price comparison service. We generally sell our text-based ads on a prepaid basis. Our Yandex.Direct and Yandex.Market customers 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.

        We recognize our advertising revenues net of value added tax (currently 18.0% in Russia), sales commissions and customer credits. 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 paid to these agencies.

        We benefit from a large and diverse base of advertisers. We had more than 130,000 advertisers in 2009 and more than 180,000 advertisers in 2010. 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

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corporations. No particular advertiser accounted for more than 1% of our total revenues in 2009, 2010 or the first three months of 2011. On a geographical basis, we generated more than 97% of our total revenues in each of 2008, 2009, 2010 and the first three months of 2011 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 cost-per-thousand impressions 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 network in 2006, these costs annually have, in aggregate, amounted to more than one-half of the fees 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. In 2010 and the first three months of 2011, none of our ad network partners accounted for 2% or more of our total revenues.

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

    the level of internet penetration and usage in Russia and the other markets in which we operate;

    the traffic on our own websites and those of our partners in the Yandex ad network;

    the relevance, objectivity and quality of our search results and the quality of our other services and of the Yandex ad network;

    our search market share, with a larger market share allowing us to better monetize our users' search activity and attract and retain advertisers, as well as partners in our Yandex ad network;

    the demand for online advertising in Russia and the other markets in which we operate, particularly among small and medium-size businesses that have not previously used the internet as an advertising medium; and

    our ability to effectively monetize traffic generated by our websites and those of the Yandex ad network partners, including through improvements to our advanced auction and advertising placement system, while maintaining an attractive return on investment for our advertisers.

Key Trends Impacting Our Results of Operations

        Our business and revenues have grown rapidly since inception. Although we expect that our business will continue to grow, we expect our revenue growth rate to decline in the long term due to a number of factors, including the inevitable decline in growth rates as our revenues increase from a larger base, increasing competition and the increasing maturity of the online advertising market. In 2008 and 2009, our revenue growth rate was negatively impacted by weak economic conditions that prevailed globally and in Russia. The weak economic conditions resulted in a slowdown in the growth of spending on online advertising and a decrease in the amount our advertisers were willing to pay for each click or impression. Although our revenue growth rate improved in 2010 and the first three months of 2011, the pace and extent of the economic recovery will continue to affect the growth rate of our revenues in the future.

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        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 as compared to 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 50% of the advertising fees we earn from serving ads on Yandex ad network websites. 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.

        In addition, our operating margins may decrease in the future as we continue to make the investments necessary to expand our business. Substantial growth in our operations has required and will continue to require significant increases in personnel expenses, as well as substantial investments in property and equipment. Before the recent economic downturn, our headcount grew rapidly from 494 full-time employees as of December 31, 2006 to 1,636 as of December 31, 2008. During 2009, our full-time employee headcount grew only modestly to 1,761 as of December 31, 2009. During 2010 and through the first three months of 2011, however, the growth in our headcount began to increase again and we had 2,385 and 2,677 full-time employees as of December 31, 2010 and March 31, 2011, respectively. We also typically employ several hundred contract workers on a part-time basis, and the numbers of such contract workers generally varies in line with the numbers of full-time staff. We expect to continue to add significantly to headcount in the next couple of years. In addition to the increases in personnel expenses resulting from increased headcount, our rent expenses and/or depreciation and amortization expense will increase as we lease or acquire additional facilities to accommodate our growing workforce, including the additional 11,000 square meters of space we leased at our headquarters facilities in April 2011, which may result in a decrease in our operating margins.

        Future capital expenditures may also put pressure on our operating margins. As with our headcount growth, we managed our overall capital expenditures in response to the economic downturn. In 2006, 2007 and 2008, our capital expenditures were RUR 314 million, RUR 832 million and RUR 1,337 million, respectively. Our capital expenditures decreased to RUR 987 million in 2009 and then grew to RUR 2,199 million in 2010. In 2011, we currently expect that our capital expenditures will be more than double what they were in 2010, with RUR 978 million having been spent on capital expenditures in the first quarter of 2011. We currently plan to spend over 75% of our capital expenditures in 2011 on servers and data center expansion to support growth in our current operations and potential international expansion. After 2011, we currently expect our capital expenditures in the near term to increase in absolute terms but to be more in line with the level of capital expenditures in 2010 as a percentage of revenues. Increased capital expenditure will increase our depreciation and amortization expense and may result in lower operating margins.

        To support further brand enhancement and respond to competitive pressures, we currently plan to spend larger amounts in 2011 on offline advertising and marketing than we have spent historically. This increased spending could negatively impact our operating margin if it does not drive revenue growth in the manner that we anticipate.

        Our operating margin may also decline as a result of entering into more arrangements with partners that distribute our browser toolbar or search bar or that otherwise direct search queries to our website. We generally compensate our distribution partners on either a revenue-sharing basis or on the basis of the number of our browser toolbars or search bars installed. We expect to continue to expand the number of our distribution relationships in order to increase our user base and to make it easier to access our services.

        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 of January, May, June and July, when there are extended Russian public holidays and vacations, and are

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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.

        The main focus of our advertising programs is to provide relevant advertising to our users. As a result, we expect to continue to take steps to improve our users' overall web experience by seeking to increase the relevance of the ads displayed on our websites and on those of our partners in the Yandex ad network. These steps include removing ads that generate low click-through rates or that send users to irrelevant or otherwise low-quality sites, and terminating Yandex ad network partners whose websites do not meet our quality requirements. These steps could negatively affect our advertising revenues in the short term.

        Inflation in Russia has also impacted our results of operations and may continue to do so. According to the Russian Federal State Statistics Service, the consumer price index in Russia increased by 13.3%, 8.8% and 8.8% in 2008, 2009 and 2010, respectively. Inflation rates in Russia are generally higher in the first quarter of the year, with inflation rates for the three months ended March 31, 2009, 2010 and 2011 of 5.4%, 3.1% and 3.8%, respectively. Although the annual rate of inflation has been generally decreasing over the last couple of years, we can provide no assurance that it will continue to do so. Higher rates of inflation may accelerate increases in our operating expenses, most notably personnel expenses, 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 as compared to the Russian ruble can also negatively affect our results of operations. See "—Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency Exchange Risk."

Results of Operations

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

 
  Year ended December 31,   Three months
ended
March 31,
 
 
  2008   2009   2010   2010   2011  

Revenues

    100.0 %   100.0 %   100.0 %   100.0 %   100.0 %

Operating costs and expenses:

                               
 

Cost of revenues

    22.2     23.9     20.7     22.9     23.0  
 

Product development

    13.2     18.6     16.6     20.6     18.6  
 

Sales, general and administrative

    16.3     16.9     14.7     15.8     16.1  
 

Depreciation and amortization

    7.9     10.4     9.4     11.0     9.7  
                       

Total operating costs and expenses

    59.6     69.8     61.4     70.3     67.4  
                       

Income from operations

    40.4     30.2     38.6     29.7     32.6  
 

Interest income

    1.1     0.8     1.2     1.2     0.9  
 

Other income/(expense), net

    2.7     (0.3 )   0.2     (2.4 )   (6.5 )
                       

Net income before income taxes

    44.2     30.7     40.0     28.5     27.0  

Provision for income taxes

    12.4     7.7     9.5     6.9     6.0  
                       

Net income

    31.8 %   23.0 %   30.5 %   21.6 %   21.0 %
                       

        Our operating margin increased from 29.7% in the three months ended March 31, 2010 to 32.6% in the three months ended March 31, 2011. The principal reason for this increase was revenue growth coupled with increased utilization of our Moscow office space which drove down office rent expense as a

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percentage of revenues. Historically, our operating margin for the first quarter has been lower than our operating margin for the full year due to the seasonality of our revenues.

        From 2009 to 2010, our operating margin increased from 30.2% to 38.6%. This increase in our operating margin was primarily due to growth in our revenues resulting from acceleration in the growth of the online advertising market in Russia as the economy continued to recover. Additionally, our operating margin increased from 2009 to 2010 due to a decrease in traffic acquisition costs paid to our partners in the Yandex ad network as a percentage of our revenues. The decrease in traffic acquisition costs as a percentage of revenues was primarily the result of an increase in the proportion of our revenues from our own websites compared to websites of our partners in the Yandex ad network. The relative contribution of the Yandex ad network significantly decreased in 2010 primarily due to the expiration in December 2009 of an agreement with Mail.ru under which we powered its search engine and served ads on its search engine results pages. Under a separate agreement, we continue to serve ads to Mail.ru's non-search related pages.

        Our operating margin declined significantly from 40.4% in 2008 to 30.2% in 2009 following a slowdown in the growth of online advertising spend resulting from weak economic conditions that began to impact our revenues in the second half of 2008. The reduction in our operating margin was also driven by materially higher rent expenses, increased personnel costs and our increased use of distribution arrangements, offset by a reduction in traffic acquisition costs paid to our partners on the Yandex ad network. Starting in 2009, our rent expenses increased significantly as we entered into a 10-year lease on a new office building in Moscow to accommodate continuing growth in our headcount. As a result of this new lease, our total rent expenses incurred for our Moscow office facilities (excluding data centers) increased from RUR 124 million in 2008 to RUR 548 million in 2009 and RUR 574 million in 2010.

    Revenues

        The following table presents our revenues, by source, for the periods presented:

 
  Year ended December 31,   Three months
ended
March 31,
 
 
  2008   2009   2010   2010   2011  
 
  (in millions of RUR)
 

Advertising revenues(1):

                               
 

Text-based advertising:

                               
   

Yandex websites

    4,728     5,800     9,454     1,797     3,002  
   

Yandex ad network websites

    1,846     1,733     1,506     341     471  
                       
     

Total text-based advertising

    6,574     7,533     10,960     2,138     3,473  
 

Display advertising

    912     933     1,229     148     328  
                       

Total advertising revenues

    7,486     8,466     12,189     2,286     3,801  

Online payment commissions

    130     201     263     57     82  

Other revenues

    33     62     48     12     11  
                       

Total revenues

    7,649     8,729     12,500     2,355     3,894  
                       

(1)
We record revenue net of VAT, commissions and discounts. Because it is impractical to track commissions 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 and discounts between our own websites and those of our partners in the Yandex ad network proportionally to their respective revenue contributions.

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        The following table presents our revenues, by source, as a percentage of total revenues for the periods presented:

 
  Year ended December 31,   Three months
ended
March 31,
 
 
  2008   2009   2010   2010   2011  

Advertising revenues:

                               
 

Text-based advertising:

                               
   

Yandex websites

    61.8 %   66.4 %   75.6 %   76.3 %   77.1 %
   

Yandex ad network websites

    24.1     19.9     12.1     14.5     12.1  
                       
     

Total text-based advertising

    85.9     86.3     87.7     90.8     89.2  
 

Display advertising

    12.0     10.7     9.8     6.3     8.4  
                       

Total advertising revenues

    97.9     97.0     97.5     97.1     97.6  

Online payment commissions

    1.7     2.3     2.1     2.4     2.1  

Other revenues

    0.4     0.7     0.4     0.5     0.3  
                       

Total revenues

    100.0 %   100.0 %   100.0 %   100.0 %   100.0 %
                       

        Advertising revenues.    Total advertising revenues increased by RUR 1,515 million, or 66.3%, from the three months ended March 31, 2010 to the three months ended March 31, 2011, by RUR 3,723 million, or 44.0%, from 2009 to 2010, and by RUR 980 million, or 13.1%, from 2008 to 2009. 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. Paid clicks on our own websites together with those of our Yandex ad network partners increased 51% from the three months ended March 31, 2010 to the three months ended March 31, 2011, 20% from 2009 to 2010, and 33% from 2008 to 2009. The average cost-per-click on our own websites together with those of our partners in the Yandex ad network increased 7% from the three months ended March 31, 2010 to the three months ended March 31, 2011, increased 22% from 2009 to 2010, and decreased 14% from 2008 to 2009, reflecting supply and demand dynamics.

        The increase in paid clicks and fluctuation in average cost-per-click were driven primarily by the following factors:

    Growth in the number of internet users in Russia.  The number of internet users in Russia grew at a compound annual growth rate of 23% from 2004 to 2010, reaching 50 million, according to FOM.

    Increased traffic and search market share.  We experienced a significant increase in traffic on our own websites, consistent with the growth in the number of internet users in Russia, augmented by a steady increase in our search market share. According to Liveinternet.ru, our share of the Russian internet search market increased from 55% in 2008 to 57% in 2009 and to 64% in 2010, and from 62% in the three months ended March 31, 2010 to 65% in the three months ended March 31, 2011, principally as a result of improvements in our search engine algorithms and more traffic being delivered through new and existing distribution partners.

    Growth in the size of the Russian online advertising market.  The total Russian online advertising market grew from RUR 17.6 billion in 2008 to RUR 19.1 billion in 2009 and to RUR 26.7 billion in 2010, according to ZenithOptimedia.

        During 2009 and 2010, the influence of these growth factors was, however, offset by a reduction in the size of our Yandex ad network. Revenues from text-based ads delivered through the Yandex ad network decreased from RUR 1,846 million in 2008 to RUR 1,733 million in 2009 and to RUR 1,506 million in 2010. The decline between 2009 and 2010 was primarily due to the expiration in December 2009 of an agreement under which we powered Mail.ru's search engine and served ads on its search engine results

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pages. Although revenues from text-based ads delivered through our Yandex ad network increased in absolute terms in the three months ended March 31, 2011 compared to the three months ended March 31, 2010, they decreased as a percentage of our text-based advertising revenue to 13.6% from 16.0%.

        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 the factors described above, as well as other factors such 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.

        Our revenues from display advertising decreased as a percentage of our total revenues in each of the annual periods under review but increased as a percentage of total revenues when comparing the three-month periods under review. Our revenues from display advertising are affected by the average CPM paid by our advertisers, which decreased significantly from 2008 to 2009 as a result of the adverse economic conditions prevailing at that time, and to a lesser extent from 2009 to 2010. Although CPMs continued to be down when comparing the three months ended March 31, 2011 to the same period in 2010, an increase in impressions more than offset that decline in CPMs.

        Online payment commissions.    Online payment commissions increased 43.9% from the three months ended March 31, 2010 to the three months ended March 31, 2011, 30.8% from 2009 to 2010, and 54.6% from 2008 to 2009. These increases were principally due to increased e-payment transactions at Yandex.Money, which was in turn driven by the number of active Yandex.Money "e-wallets" increasing 36% from the three months ended March 31, 2010 to the three months ended March 31, 2011, 24% from 2009 to 2010, and 61% from 2008 to 2009.

        Other revenues.    Other revenues represent software sales and sales of third-party payment cards, which we currently expect to remain at relatively nominal levels in future periods.

    Operating Costs and Expenses

        Our operating costs and expenses comprise: cost of revenues; product development expenses; sales, general and administrative expenses; and depreciation and amortization expense. In addition to the reasons discussed below with respect to each category, we generally expect our total operating costs and expenses to increase materially in absolute terms in the near term which may also result in an increase as a percentage of revenues.

        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 browser toolbars or search bars 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 two largest distribution partners, Mozilla and Opera, accounted in aggregate for 57% of our distribution costs in 2010 and 56% in the three months ended March 31, 2011. Our agreement with Opera expires on April 1, 2012, but automatically renews for one additional year unless either party gives 30 days notice of non-renewal. The initial term of our agreement with Mozilla expires on March 31, 2012, and may be terminated thereafter by either party on 45 days written notice. Both the Mozilla and Opera agreements may only be terminated earlier as a result of a material breach of the contract. Both agreements include a 12-month "revenue tail" period under which we are committed to continue to make distribution payments

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to the distribution partner after the expiration of the agreement for revenue generated from traffic on Yandex search bars that were installed before the expiration of the agreement.

        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; content acquisition costs; and costs of online payments processing.

        The following table presents the primary components of our cost of revenues for the periods presented:

 
  Year ended December 31,   Three months ended
March 31,
 
 
  2008   2009   2010   2010   2011  
 
  (in millions of RUR, except percentages)
 

Traffic acquisition costs:

                               
 

Traffic acquisition costs related to the Yandex ad network

    1,194     1,067     921     207     294  
 

Traffic acquisition costs related to distribution partners

    76     238     652     110     244  

Total traffic acquisition costs

    1,270     1,305     1,573     317     538  

Total traffic acquisition costs as a percentage of revenues

    16.6 %   15.0 %   12.6 %   13.5 %   13.8 %

Other cost of revenues

   
431
   
781
   
1,012
   
222
   
356
 

Other cost of revenues as a percentage of revenues

    5.6 %   8.9 %   8.1 %   9.4 %   9.2 %

Total cost of revenues

   
1,701
   
2,086
   
2,585
   
539
   
894
 

Total cost of revenues as a percentage of revenues

    22.2 %   23.9 %   20.7 %   22.9 %   23.0 %

        Cost of revenues increased by RUR 355 million, or 65.9%, from the three months ended March 31, 2010 to the three months ended March 31, 2011, primarily due to a RUR 221 million increase in traffic acquisition costs. The majority of our traffic acquisition costs relate to the Yandex ad network, with a smaller but increasing portion relating to distribution relationships. Traffic acquisition costs relating to the Yandex ad network increased by RUR 87 million, representing our Yandex ad network partners' share in an increased amount of Yandex ad network revenue for the period. In addition, the amounts paid to our distribution partners increased by RUR 134 million due to growth in our existing distribution relationships, as well as the addition of new distribution partners. Other cost of revenues increased by RUR 134 million primarily due to an additional RUR 89 million in rent and utilities costs related to our data centers, an increase in personnel expenses of RUR 23 million, RUR 11 million in additional content acquisition costs and RUR 9 million in additional outsourcing costs.

        Cost of revenues increased by RUR 499 million, or 23.9%, from 2009 to 2010, primarily due to traffic acquisition costs increasing by RUR 268 million. Traffic acquisition costs related to the Yandex ad network as a percentage of advertising revenues from the Yandex ad network remained at approximately the same level for 2010 compared to 2009. The significant majority of our traffic acquisition cost increase between 2009 and 2010 resulted from a RUR 414 million increase in amounts paid to our partners that distribute our browser toolbar or search bar, or that otherwise direct search queries to our website. This increase was partly offset by the effect of the expiration of an agreement with Mail.ru, under which we powered its search engine and served ads on its search engine results pages until December 31, 2009. The expiration of this agreement was also the primary reason for the decrease in traffic acquisition costs as a percentage of total revenues from 2009 to 2010. Other cost of revenues increased due to RUR 185 million in additional rent and utilities costs related to our data centers, an increase in personnel expenses of RUR 40 million, RUR 25 million in additional costs for outsourced services and RUR 16 million in additional content acquisition costs. The increase in personnel costs was driven primarily by growth in the portion of our

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headcount that is allocated to cost of revenues, from 198 as of December 31, 2009 to 219 as of December 31, 2010. These increases were partly offset by a decrease of RUR 24 million in bandwidth costs resulting from our re-negotiation of the telecommunication rates we pay and a decrease of RUR 15 million in office rent expense due to our allocation of more space to other functional areas as the headcount of those functional areas grew relatively faster.

        Cost of revenues increased by RUR 385 million, or 22.6%, from 2008 to 2009. This increase was primarily the result of increases of RUR 114 million in personnel and office rent expenses, RUR 121 million in rent and utilities costs related to our data centers, RUR 48 million in bandwidth costs, RUR 35 million in traffic acquisition costs, RUR 29 million of content acquisition costs, and RUR 20 million in other cost of revenues related to Yandex.Money. The decrease in traffic acquisition costs as a percentage of revenues was primarily the result of an increase in the proportion of our revenues from our own websites compared to websites of our partners in the Yandex ad network. This decrease was partially offset by an increase in traffic acquisition costs related to distribution partners between 2008 and 2009 as we continued to increase the number of our distribution partners. The increase in personnel and office rent expenses was driven primarily by the growth in the portion of our headcount that is allocated to cost of revenues from 174 as of December 31, 2008 to 198 as of December 31, 2009, and increases in office rent and utilities costs over the same period. Bandwidth costs increased as we leased fiber optic lines to reach major Russian and CIS cities as a part of our program to expand the number of our points-of-presence in an effort to increase the access speed for our services.

        We anticipate that cost of revenues will continue to increase in absolute terms and may increase as a percentage of revenues in the near term, primarily as a result of increases in traffic acquisition and data center costs. The primary drivers of increases in our future traffic acquisition costs as a percentage of advertising revenues are the percentage of revenues derived from our own websites as compared to the percentage 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. 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 whether increased competition for these arrangements with existing and potential new partners in the Yandex ad network results in less favorable revenue-sharing arrangements.

        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, and product development expenses as a percentage of revenues, for the periods presented:

 
  Year ended December 31,   Three months ended
March 31,
 
 
  2008   2009   2010   2010   2011  
 
  (in millions of RUR, except percentages)
 

Product development expenses

    1,013     1,619     2,073     486     723  

Product development expenses as a percentage of revenues

    13.2 %   18.6 %   16.6 %   20.7 %   18.6 %

        Product development expenses increased by RUR 237 million, or 48.8%, from the three months ended March 31, 2010 to the three months ended March 31, 2011, by RUR 454 million, or 28.0%, from 2009 to 2010, and by RUR 606 million, or 59.8%, from 2008 to 2009. These increases were primarily due to increases in personnel and office rent expenses resulting from increases in headcount and salary over the

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periods. Development personnel headcount increased from 978 to 1,427 as of March 31, 2010 and 2011, respectively, and from 890 to 947 and to 1,313 as of December 31, 2008, 2009 and 2010, respectively. As a percentage of revenues, product development expenses decreased for the three-month periods under review and from 2009 to 2010 primarily because we increased the utilization of our Moscow office space, allowing us to increase headcount without a commensurate increase in office rent expense.

        We anticipate that product development expenses will increase in absolute terms and may increase as a percentage of revenues in the near term as we continue to hire product development personnel, add additional office space and expand the breadth and depth of our service offerings.

        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.

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

 
  Year ended December 31,   Three months ended
March 31,
 
 
  2008   2009   2010   2010   2011  
 
  (in millions of RUR, except percentages)
 

Sales, general and administrative expenses

    1,250     1,474     1,838     372     628  

Sales, general and administrative expenses as a percentage of revenues

    16.3 %   16.9 %   14.7 %   15.8 %   16.1 %

        Sales, general and administrative expenses increased by RUR 256 million, or 68.8%, from the three months ended March 31, 2010 to the three months ended March 31, 2011 and also increased slightly as a percentage of revenues. This increase was primarily due to a RUR 132 million increase in personnel expenses resulting from a rise in sales, general and administrative headcount from 686 as of March 31, 2010 to 989 as of March 31, 2011 and salary increases. Also contributing to the overall increase were increases of RUR 25 million in miscellaneous office expenses, RUR 21 million in share-based compensation expense, RUR 20 million in advertising and marketing expenses and RUR 15 million in business travel expenses.

        Sales, general and administrative expenses increased by RUR 364 million, or 24.7%, from 2009 to 2010, but decreased as a percentage of revenues as our business expanded. The increase in absolute terms from 2009 to 2010 was primarily due to a RUR 236 million increase in personnel and office rent expenses resulting from a rise in sales, general and administrative headcount from 616 as of December 31, 2009 to 853 as of December 31, 2010, and salary increases. Also contributing to the overall increase from 2009 to 2010 were increases of RUR 79 million in advertising expenses, RUR 54 million in miscellaneous office expenses, RUR 21 million in business travel expenses, and RUR 24 million in other operating taxes primarily related to increases in property tax and the write-off of non-recoverable value-added tax. These increases were partly offset by a RUR 82 million decrease in share-based compensation expense and a RUR 15 million decrease in bad debts expense.

        Sales, general and administrative expenses increased by RUR 224 million, or 17.9%, from 2008 to 2009, and also increased as a percentage of revenues. The increase in absolute terms was primarily due to an increase of RUR 316 million in personnel and office rent expenses as a result of an increase in sales, general and administrative headcount from 572 as of December 31, 2008 to 616 as of December 31, 2009, salary increases and a significant increase in rent expenses in 2009 after moving into our new Moscow office facilities. Also contributing to the overall increase was a RUR 47 million increase in share-based compensation expense, offset by a RUR 83 million decrease in legal and audit fees primarily associated with a planned offering of securities in 2008 that was subsequently postponed and a RUR 76 million

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decrease in advertising expenses due to cost-cutting measures implemented in reaction to the economic downturn.

        We anticipate that our sales, general and administrative expenses will continue to increase in absolute terms in 2011 and future periods and may increase as a percentage of revenues as we continue to expand our business. These increases will relate primarily to increased personnel and office rent expenses and to the additional expenses associated with being a public company, as well as anticipated significant increases in offline advertising.

        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, and depreciation and amortization expense as a percentage of revenues, for the periods presented:

 
  Year ended December 31,   Three months ended
March 31,
 
 
  2008   2009   2010   2010   2011  
 
  (in millions of RUR, except percentages)
 

Depreciation and amortization expense

    600     912     1,181     259     377  

Depreciation and amortization expense as a percentage of revenues

    7.9 %   10.4 %   9.4 %   11.0 %   9.7 %

        Depreciation and amortization expense increased by RUR 118 million, or 45.6%, from the three months ended March 31, 2010 to the three months ended March 31, 2011. The increase in absolute terms between the three-month periods was primarily due to a RUR 98 million increase in depreciation expense related to computer equipment and a RUR 18 million increase in depreciation expense related to software. The increase in depreciation expense for both categories was the result of capital expenditures in 2010 and the first three months of 2011.

        Depreciation and amortization expense increased by RUR 269 million, or 29.5%, from 2009 to 2010. The increase in absolute terms from 2009 to 2010 was primarily due to a RUR 249 million increase in depreciation expense related to the acquisition of computer equipment in 2009 and 2010, partly offset by a decrease of RUR 12 million in depreciation expense related to leasehold improvements. During 2010, we also recorded an additional RUR 27 million in amortization expense relating to purchased technologies and licenses and acquisition-related intangibles.

        Depreciation and amortization expense increased by RUR 312 million, or 52.0%, from 2008 to 2009. This increase in absolute terms was primarily due to a RUR 256 million increase in depreciation expense related to the acquisition of computer equipment in 2008 and 2009. Additionally, we recorded RUR 46 million in amortization expense relating to purchased technologies and licenses and acquisition-related intangibles.

        We anticipate that our depreciation and amortization expense will continue to increase in absolute terms in 2011 and future periods and may increase as a percentage of revenues as we continue to invest in our technology infrastructure.

        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 optionee'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.

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

 
  Year ended December 31,   Three months ended
March 31,
 
 
  2008   2009   2010   2010   2011  
 
  (in millions of RUR, except percentages)
 

Share-based compensation expense

    140     209     160     33     70  

Share-based compensation expense as a percentage of revenues

    1.8 %   2.4 %   1.3 %   1.4 %   1.8 %

        Share-based compensation expense increased by RUR 37 million, or 112.1%, from the three months ended March 31, 2010 to the three months ended March 31, 2011, primarily because of additional options granted in November 2010 where the fair value of those options was significantly higher than in previous grants. See "—Critical Accounting Policies, Estimates and Assumptions—Share-based compensation expense."

        Share-based compensation expense decreased by RUR 49 million, or 23.4%, from 2009 to 2010 primarily because options granted to our management between 2005 and 2007 became fully vested in 2009 and 2010. The increase in share-based compensation expense by RUR 69 million, or 49.3%, from 2008 to 2009 was primarily due to additional options granted to new and existing employees.

        We expect share-based compensation expense to be approximately RUR 235 million for the full year in 2011, excluding the impact of grants to be made in 2011. To the extent forfeiture rates are different than we have anticipated, share-based compensation expense related to these awards may be different from our expectations.

        In addition, shortly after the closing of this offering, we plan to grant an aggregate of approximately 100,000 units of phantom shares to virtually all of our employees. Each recipient will receive 10 units for each year of service to our company up to a maximum of 50 units. The phantom share units will have no exercise price and will likely vest and be settled on December 30, 2011. As a result, we anticipate that we will need to recognize approximately RUR 60 million of additional share-based compensation expense (based on the midpoint of the estimated price range set forth on the cover page of this prospectus) over the requisite service period. The compensation committee of our board is still considering the exact terms of these phantom share units. We currently anticipate that these units will provide for cash settlement based on the closing trading price of our Class A shares on December 30, 2011. Because we expect to settle these units in cash, we anticipate that we will account for these units as liabilities and we will be required to remeasure the share-based compensation expense based on the market value of our shares at the end of each quarter as compared to the previous quarter on a quarterly basis for so long as the units remain outstanding.

    Interest Income

        Interest income comprises interest earned on our cash equivalents and term deposits. Interest income increased from RUR 28 million in the three months ended March 31, 2010 to RUR 34 million in the three months ended March 31, 2011, and increased from RUR 67 million in 2009 to RUR 156 million in 2010, as a result of a general increase in our cash equivalents and term deposits balances. Interest income decreased from RUR 86 million in 2008 to RUR 67 million in 2009 as a result of a decline in interest rates on our U.S. dollar-denominated deposits.

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    Other Income/(Expense), Net

        Our other income/(expense) primarily comprises foreign exchange gains and losses generally resulting from changes in the value of the U.S. dollar as compared to the Russian ruble, and, to a lesser extent, other non-operating gains and losses.

        The following table presents the components of our other income/(expense), and other income/(expense) as a percentage of revenues, for the periods presented:

 
  Year ended December 31,   Three months ended
March 31,
 
 
  2008   2009   2010   2010   2011  
 
  (in millions of RUR, except percentages)
 

Foreign exchange gains/(losses)

    65     (64 )   11     (57 )   (254 )

Other

    143     41     13          

Total other income/(expense), net

   
208
   
(23

)
 
24
   
(57

)
 
(254

)

Total other income/(expense), net, as a percentage of revenues

    2.7 %   (0.3 )%   0.2 %   (2.4 )%   (6.5 )%

        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 income statement. In 2008, other income includes RUR 65 million of foreign exchange gains arising from the appreciation of the U.S. dollar as compared to the Russian ruble principally in the fourth quarter of that year. In contrast, in the three months ended March 31, 2011, we recorded as other expense RUR 254 million in foreign exchange losses arising from the material decline in the value of the U.S. dollar as compared to the Russian ruble during that period. Although the U.S. dollar value of our U.S. dollar-denominated cash, cash equivalents and term deposits was not impacted by these currency fluctuations, they resulted in upward and downward re-valuations, respectively, of the ruble equivalent of these U.S. dollar-denominated monetary assets.

        Other income/(expense) also includes other non-operating gains and losses and, in 2008, includes RUR 120 million of other income related to a cash penalty paid to us in connection with the termination of a preliminary lease agreement.

    Provision for Income Taxes

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

 
  Year ended December 31,   Three months ended
March 31,
 
 
  2008   2009   2010   2010   2011  
 
  (in millions of RUR, except percentages)
 

Provision for income taxes

    947     672     1,186     163     232  

Effective tax rate

    28.0 %   25.1 %   23.7 %   24.3 %   22.1 %

        Our provision for income taxes increased by RUR 69 million from the three months ended March 31, 2010 to the three months ended March 31, 2011, and by RUR 514 million from 2009 to 2010, primarily as a result of an increase in taxable income. Our provision for income taxes decreased RUR 275 million from 2008 to 2009, as a result of a reduction in the Russian statutory tax rate from 24% to 20% coupled with a decrease in taxable income.

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        Our effective tax rate decreased by 2.2 percentage points when comparing the three months ended March 31, 2010 and 2011. This decline was due to an expected decrease in the effective tax rate of our largest Russian subsidiary as a result of a decrease in our 2011 forecasted non-deductible expenses relative to forecasted pre-tax income. Additionally, our effective tax rate decreased between the three-month periods as we began to recognize a deferred tax benefit for net operating loss carryforwards in certain of our non-Russian subsidiaries in the fourth quarter of 2010 because we believe we will be able to utilize these net operating loss carryforwards in the foreseeable future.

        Our effective tax rate decreased by 1.4 percentage points from 2009 to 2010 primarily due to a decrease in share-based compensation expense in 2009 compared to 2010. Share-based compensation expense is not deductible for tax purposes in Russia and most of the other jurisdictions in which we pay tax.

        Our effective tax rate decreased from 28.0% to 25.1% from 2008 to 2009, primarily as a result of a reduction in the Russian statutory tax rate from 24% to 20%.

        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 prospectus.

Quarterly Results of Operations

        The following tables present our unaudited quarterly results of operations in rubles and as a percentage of revenue for the nine consecutive quarters ended March 31, 2011. You should read the following tables together with our consolidated financial statements and related notes contained elsewhere in this prospectus. 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.

        Additionally, 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. In each of the quarters ended March 31, 2009 and June 30, 2010, we recorded RUR 143 million of foreign exchange gains in other income as a result of the appreciation of the U.S. dollar against the Russian ruble in those quarters. In the quarter ended March 31, 2011, we recorded RUR 254 million of foreign exchange losses as a result of the depreciation of the U.S. dollar against the Russian ruble in that quarter.

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

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  Quarter ended  
 
  Mar 31,
2009
  Jun 30,
2009
  Sep 30,
2009
  Dec 31,
2009
  Mar 31,
2010
  Jun 30,
2010
  Sep 30,
2010
  Dec 31,
2010
  Mar 31,
2011
 
 
  (in millions of RUR)
 

Consolidated statements of income data:

                                                       

Revenues

    1,742     2,046     2,172     2,769     2,355     2,889     3,131     4,125     3,894  

Operating costs and expenses:

                                                       
 

Cost of revenues(1)

    453     463     516     654     539     586     665     795     894  
 

Product development(1)

    380     348     379     512     486     472     521     594     723  
 

Sales, general and administrative(1)

    332     346     349     447     372     415     465     586     628  
 

Depreciation and amortization

    199     243     232     238     259     272     307     343     377  
                                       

Total operating costs and expenses

    1,364     1,400     1,476     1,851     1,656     1,745     1,958     2,318     2,622  
                                       

Income from operations

    378     646     696     918     699     1,144     1,173     1,807     1,272  

Interest income

    7     12     23     25     28     39     43     46     34  

Other income/(expense), net

    152     (99 )   (82 )   6     (57 )   143     (60 )   (2 )   (254 )
                                       

Income before income taxes

    537     559     637     949     670     1,326     1,156     1,851     1,052  

Provision for income taxes

    121     134     144     273     163     309     273     441     232  
                                       

Net income

    416     425     493     676     507     1,017     883     1,410     820  
                                       

 

 
  Quarter ended  
 
  Mar 31,
2009
  Jun 30,
2009
  Sep 30,
2009
  Dec 31,
2009
  Mar 31,
2010
  Jun 30,
2010
  Sep 30,
2010
  Dec 31,
2010
  Mar 31,
2011
 

As a percentage of revenues:

                                                       

Revenues

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

Operating costs and expenses:

                                                       
 

Cost of revenues(1)

    26.0     22.6     23.8     23.6     22.9     20.3     21.2     19.3     23.0  
 

Product development(1)

    21.8     17.0     17.4     18.5     20.6     16.3     16.7     14.4     18.6  
 

Sales, general and administrative(1)

    19.1     16.9     16.1     16.1     15.8     14.4     14.9     14.2     16.1  
 

Depreciation and amortization

    11.4     11.9     10.7     8.6     11.0     9.4     9.8     8.3     9.7  
                                       

Total operating costs and expenses

    78.3     68.4     68.0     66.8     70.3     60.4     62.5     56.2     67.4  
                                       

Income from operations

    21.7     31.6     32.0     33.2     29.7     39.6     37.5     43.8     32.6  

Interest income

    0.4     0.6     1.1     0.9     1.2     1.3     1.4     1.1     0.9  

Other income/(expense), net

    8.7     (4.8 )   (3.8 )   0.2     (2.4 )   4.9     (1.9 )       (6.5 )
                                       

Income before income taxes

    30.8     27.4     29.3     34.3     28.5     45.8     37.0     44.9     27.0  

Provision for income taxes

    6.9     6.5     6.6     9.9     6.9     10.7     8.7     10.7     6.0  
                                       

Net income

    23.9 %   20.9 %   22.7 %   24.4 %   21.6 %   35.1 %   28.3 %   34.2 %   21.0 %
                                       

(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 March 31, 2011, we had RUR 6,728 million in cash, cash equivalents and term deposits. Cash equivalents comprise bank deposits with original maturities of three months or less, whereas current term deposits comprise bank deposits with original maturities of more than three months but no more than one year. Our non-current term deposits are bank deposits with original maturities of more than one year. Our current policy is to maintain 60% or more of our cash, cash equivalents and term deposits in U.S. dollar-denominated accounts. We maintain our U.S. dollar-denominated accounts almost entirely in Russia and the Netherlands.

        Since 2002, our principal source of liquidity has been cash flow generated from the operations of our Russian subsidiaries. Our parent company is a Dutch holding company that generates no operating cash flow itself. To date, our parent company has required funding to make dividend payments to our shareholders and for general and administrative expenses. To meet these funding requirements, we have distributed dividends from our principal Russian operating subsidiary to our parent company. 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. The cumulative net profit of our Russian subsidiaries calculated in accordance with Russian accounting principles 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, unused vacation, deferred tax and bad debt reserves) 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 accounting rules, the amount that our Russian operating subsidiary would be permitted to dividend to our parent company as of March 31, 2011 was approximately RUR 8,277 million ($291.1 million). We are required to pay a 5% withholding tax on all dividends paid from our Russian operating subsidiaries to our parent company. 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. See "Dividend Policy."

        Part of our cash balances represent balances we hold for our Yandex.Money customers. These customers are entitled to use or withdraw the balance of their accounts with us at any time without prior notice. As of March 31, 2011, these Yandex.Money customer accounts totaled RUR 694 million, excluding funds payable by us in connection with Yandex.Money transactions that were in the process of settlement as of that date. We seek to manage our cash balances to ensure that we have sufficient cash on hand to meet withdrawal and transaction requests, even those that would exceed historical levels.

        As of March 31, 2011, we had no outstanding indebtedness. We do not currently maintain any line of credit or other similar source of liquidity.

    Cash Flows

        In summary, our cash flows were:

 
  Year ended December 31,   Three months
ended March 31,
 
 
  2008   2009   2010   2010   2011  
 
  (in millions of RUR)
 

Net cash provided by operating activities

    3,341     3,187     5,963     1,004     1,121  

Net cash used in investing activities

    (1,433 )   (2,928 )   (4,066 )   (1,193 )   (1,185 )

Net cash used in financing activities

    (454 )   (232 )   (907 )       (7 )

Effect of exchange rate changes on cash

    209     120     (24 )   (47 )   (146 )

        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, share-based

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compensation expense, deferred tax benefit/expense, foreign exchange gains and losses, and the effect of changes in working capital. Cash provided by operating activities increased by RUR 117 million from the three months ended March 31, 2010 to the three months ended March 31, 2011. This increase was primarily due to an increase of RUR 313 million in net income and an increase of RUR 235 million in non-cash adjustments to net income, and was partially offset by a decrease of RUR 431 million in cash provided by changes in working capital. Cash provided by working capital decreased between the three-month periods primarily due to significant increases in prepaid rent expenses related to our Moscow headquarters as well as increases in prepaid taxes and funds receivable, partly offset by increases in accounts payable.

        From 2009 to 2010, cash provided by operating activities increased by RUR 2,776 million. This increase was primarily due to an increase of RUR 1,807 million in net income and an increase of RUR 785 million in cash provided by changes in working capital. Cash provided by working capital increased between the years primarily due to significant decreases in prepaid rent expenses for our Moscow headquarters and increases in accounts and funds payable that positively impacted cash flow from operations, which were partly offset by increases in accounts receivable driven by an increase in post-paid sales. When comparing 2009 to 2010, adjustments for non-cash items included an increase in depreciation and amortization expense of RUR 269 million partly offset by decreases in share-based compensation expense of RUR 49 million and foreign exchange losses of RUR 75 million.

        From 2008 to 2009, cash provided by operating activities decreased by RUR 154 million. This decrease was primarily due to a decrease of RUR 422 million in net income partly mitigated by increases in non-cash adjustments to net income. Depreciation and amortization expense increased by RUR 312 million, foreign exchange losses increased by RUR 129 million and share-based compensation expense increased by RUR 69 million. Cash provided by working capital decreased by RUR 210 million primarily due to significant increases in prepaid rent expenses related to our new Moscow office facilities and accounts receivable, partly offset by increases in accounts and taxes payable and decreases in funds receivable.

        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.    Cash used in investing activities in the three months ended March 31, 2011 decreased by RUR 8 million compared with the three months ended March 31, 2010 as a result of an increase in capital expenditures of RUR 754 million offset by a decrease in cash placed in term deposits, net of maturities, of RUR 762 million.

        Cash used in investing activities in 2010 increased by RUR 1,138 million over 2009 as a result of an increase in capital expenditures of RUR 1,212 million and a decrease in cash placed in term deposits, net of maturities, of RUR 77 million. In 2009, we used cash of RUR 232 million for acquisitions, including RUR 147 million paid as contingent consideration in March 2009 in connection with our acquisition of Yandex.Money in 2007 and RUR 85 million paid for the acquisition of a 99.99% ownership interest in Awaps LLC. In 2010, we used cash of RUR 235 million for acquisitions, including RUR 92 million for the acquisition of an 18.4% ownership interest in Vizi Information Labs Ltd., an Israeli face recognition technology developer, and RUR 143 million for the acquisition of a 100% ownership interest in GIS Technology LLC, a company specializing in the production of electronic maps.

        Cash used in investing activities in 2009 increased by RUR 1,495 million over the same period in 2008 primarily as a result of an increase in cash placed in term deposits, net of maturities, of RUR 1,731 million, partly offset by a decrease in capital expenditures of RUR 350 million. In 2008, we used cash of

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RUR 118 million for the acquisition of SmiLink LLC, a provider of content for our road traffic monitoring service. In 2009, we used cash of RUR 232 million for the acquisitions discussed above.

        Our capital expenditures have historically primarily comprised the purchase of servers and networking equipment. 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 heavily in data center operations, technology, corporate facilities and information technology infrastructure in 2011 and thereafter. Moreover, we may spend a significant amount of cash on acquisitions and licensing transactions from time to time.

        Cash used in financing activities.    Cash used in financing activities increased by RUR 7 million from the three months ended March 31, 2010 to the three months ended March 31, 2011, and by RUR 675 million from 2009 to 2010. The increase from 2009 to 2010 was primarily due to an increase in dividends paid of RUR 746 million between the two years.

        Cash used in financing activities decreased by RUR 222 million from 2008 to 2009 primarily due to a decrease in dividends paid of RUR 296 million, partly offset by a RUR 75 million increase in cash used to purchase vested options and restricted shares from departing employees net of payments to us upon the exercise of options.

Off-Balance Sheet Items

        We do not currently engage in off-balance sheet financing arrangements. As of the date of this prospectus, we do not have any interest in entities referred to as variable interest entities, which includes special purposes entities and other structured finance entities.

Contractual Obligations

        The following table sets forth our contractual obligations as of March 31, 2011:

 
  Payments due by period  
 
  Total   Through
2011
  2012
through
2013
  2014
through
2015
  Thereafter  
 
  (in millions of RUR)
 

Operating lease obligations

    5,427     563     1,611     1,496     1,757  

Purchase obligations

    422     422              
                       

Total contractual obligations

    5,849     985     1,611     1,496     1,757  

        The table above presents our long-term rent obligations for our office and data center facilities as well as contractual purchase obligations primarily related to data center operations and facility build-outs. 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 March 31, 2011. All amounts shown include value added tax.

        In addition to the amounts shown above, in late April 2011 we entered into two lease agreements for an aggregate of approximately 11,000 additional square meters of office space located in our headquarters complex in Moscow. These leases have seven year terms and will entail minimum aggregate commitments of approximately RUR 2.1 billion, with approximately RUR 257 million due during the remainder of 2011, RUR 584 million during in 2012 through 2013, RUR 641 million due in 2014 through 2015, and RUR 626 million due thereafter. The rent under these leases is denominated in U.S. dollars, but payable in rubles. The aggregate amount of the commitment could increase because the lease protects the landlord against depreciation of the U.S. dollar. See "—Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency Exchange Risk."

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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, 2008, 2009 and 2010, included elsewhere in this prospectus. 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:

    Share-based compensation expense

        We estimate the fair value of share options 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 following assumptions in our option-pricing model when valuing share-based awards:

 
  Year ended December 31,  
 
  2008   2009   2010  

Expected option term (years)

    6.03-6.12     5.30-6.12     6.08-6.12  

Expected annual price volatility

    41%     64%     62%  

Risk-free interest rate

    5.29%     4.50%     4.00%  

Expected dividend yield

             

        The expected option term represents the weighted-average period during which our option awards are expected to be outstanding. The expected term is based on the simplified method outlined in the SEC's Staff Accounting Bulletin No. 107, Share-Based Compensation, because we are a privately held company with share-based compensation plans that are relatively new. Accordingly, we have relatively little experience or history to be able to determine the expected term over which our option awards will be held before exercise.

        With respect to price volatility, because we have been operating as a private company since inception with no active market for our shares or option awards, it is not possible to use actual price volatility data. Therefore, we estimate the volatility of our shares based on the historical volatility of peer group companies over a period which approximates our expected term of option awards. Using an expected volatility based on the average historical volatility of other entities may result in variability when compared to actual historical volatility once we have a public market for our shares.

        We base the risk-free interest rate that we use in our option-pricing model on the implied yield currently available on Russian Eurobonds with a remaining term approximating the expected term of the option award being valued.

        In the past, we have declared and paid dividends, including with respect to the years ended December 31, 2008 and 2010. We did not declare any dividends with respect to the year ended December 31, 2009 or the three months ended March 31, 2011. Currently, we do not have any plans to pay dividends in 2011 or in the near term. When we declared dividends in 2008 and 2010, we followed the practice of paying optionees bonuses calculated as an amount per vested option share equal to the amount of the dividend declared per share. Because optionees were generally compensated for dividends and we have no plans to pay cash dividends in the near term, we used an expected dividend yield of zero in our option pricing model for option awards granted in the years ended December 31, 2008, 2009 and 2010.

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        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. To properly attribute compensation expense, we are required to estimate pre-vesting forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. To estimate forfeitures, we have analyzed our historical forfeiture trends and adjusted them as appropriate for exceptional circumstances, such as the departure of two senior employees who had a disproportionate number of option awards. Excluding the effect of these two departures, our forfeiture rate is insignificant. As a result, we have applied an estimated forfeiture rate of zero. If the actual forfeiture rate is materially different from the estimate, share-based compensation expense could be materially lower than what has been recorded.

        We have granted the following option awards since September 30, 2009:

Grants made during the month of
  Number of shares
underlying
option award
  Exercise price
per share
 

November 2009

    1,646,000   $ 3.51  

June 2010

    1,965,000   $ 4.16  

August 2010

    112,000   $ 4.16  

November 2010

    2,451,000   $ 8.77  

January 2011

    60,000   $ 8.77  

        Because there has been no public market for our shares, our board of directors has regularly determined the fair value of our shares and set the exercise price of option awards on the basis of valuations of our company arrived at by employing the "income approach" and the "market approach" valuation methodologies. This approach is consistent with the methods outlined in the AICPA Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

        Under the income approach, we relied on the discounted cash flows (DCF) method. The DCF method involves applying appropriate discount rates to estimated cash flows that are based on forecasts of revenue and costs. Key assumptions associated with the income approach include projected revenue, profit and cash flows which reflect management's best estimates of our future operations at the time; a terminal value, which attributes value to cash flows for the years beyond the projection period; and a discount rate, which reflects the risks associated with the business.

        Under the market approach, we relied on the guideline publicly traded company method as well as the prior transaction method, if such transactions were available. The publicly traded company method provides an indication of our value by comparing the enterprise value to earnings and revenue multiples of similar publicly traded companies in our industry. In applying the prior transaction method, we considered the most recent transaction in our company's shares.

        Set forth below is a detailed description of the approaches used by our board of directors to determine the fair market value of our shares for purposes of setting the exercise price for option awards granted since September 30, 2009:

        November 2009 option awards.    In November 2009, we granted option awards to purchase an aggregate of 1,646,000 shares at an exercise price of $3.51 per share. Our board of directors determined the fair value of the shares underlying those option awards using the prior transaction method, on the basis of the final price set upon the closing of the two recent arm's length transactions which closed in August and October 2009. The August 2009 transaction involved the sale and purchase of 27,575,925 of our shares at a price per share of $3.51 per share, for a total deal size of $96.8 million. In the October 2009 transaction, certain shareholders of a holding company that held as its sole asset an investment in our shares purchased and sold shares in the holding company at a price that implied a $3.51 per share for our shares. The total size of that transaction was $8.1 million.

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        June 2010 and August 2010 option awards.    In June 2010 and August 2010, we granted option awards to purchase an aggregate of 1,965,000 and 112,000 shares, respectively, at an exercise price of $4.16 per share. Our board of directors determined that $4.16 was the fair value of our shares at the time of those option awards on the basis of preliminary information about the valuation at which an arm's length transaction in our shares was to occur. Negotiations for that transaction began in May 2010 and the transaction closed on September 28, 2010. In that transaction, certain shareholders of a holding company that held as its sole asset an investment in our shares purchased shares from another shareholder in the holding company at a price that implied a price per share for our shares of $4.41. The total size of this transaction was $10.1 million.

        Because of the difference between the price at which the arm's length transaction ultimately closed ($4.41 per share) and the exercise price set for our June 2010 and August 2010 option awards ($4.16 per share), in January 2011, we retrospectively valued our shares as of June 2010. For this retrospective valuation, the income approach, using the DCF method, and the market approach were employed to determine the fair value of the shares underlying the option awards. Under the market approach, the guideline publicly traded company and the prior transaction methods were relied upon. Each of the three methods employed was weighted equally. In the DCF model, a discount rate of 12.78% was used. The prior transaction method considered the September 2010 transaction that implied a price for our shares of $4.41 per share. Because our company's shares are not publicly traded, the valuation analysis performed for the June 2010 option awards employed a discount for lack of marketability of 17.91%. Moreover, because the underlying shares being valued for input into the BSM pricing model represent a minority interest, the valuation analysis was performed using a minority discount of 18.67%. This retrospective valuation reconfirmed the fair value of our shares at June 2010 to be $4.16 per share. Our board determined that the June 2010 valuation should also be used to determine the fair value of our shares for purposes of our August 2010 option awards for the following reasons: the arm's length transaction involving our shares that ultimately closed on September 28, 2010 was still being negotiated in August 2010; no major changes had occurred to our business or in the industry or equity markets generally between the June 2010 and August 2010 option awards; and the August 2010 option awards were, in aggregate, relatively small compared to our typical round of option awards.

        November 2010 and January 2011 option awards.    On November 3, 2010, our board of directors approved the grant of option awards to purchase an aggregate of 2,511,000 shares at an exercise price equal to the fair value of one share as of that date, to be determined by a contemporaneous valuation study to be undertaken promptly following that date. Based on the results of that valuation study, which was completed in late January 2011, we set the exercise price for these option awards at $8.77 per share. For the November 2010 grants, the income approach, using the DCF method, and the market approach were again employed. In the DCF model, a discount rate of 12.36% was used. A discount for lack of marketability of 9.56% and a minority discount of 18.67% were also used. When employing the market approach, the valuation study relied exclusively on the guideline publicly traded company method. The prior transaction method was not used for the November 2010 valuation study because it was determined that changes in market conditions (discussed below) since the most recent arm's length transaction in our shares that closed in September 2010 rendered this transaction a less reliable indicator of the value of our company. Each of results of the DCF method and the guideline publicly traded company approach were weighted equally for purposes of the November 2010 option awards.

        In connection with the November 3, 2010 board approval to grant option awards to purchase 2,511,000 shares, we granted option awards to purchase 2,451,000 shares as of that date but delayed the grant of option awards for the remaining 60,000 shares until January 11, 2011 when the three intended recipients of those option awards (to whom we had extended offers of employment as of November 3, 2010) formally became our employees. We used the same exercise price of $8.77 per share for the January 2011 option awards as for the November 2010 option awards given the proximity of the two grant dates and the fact that the January 2011 option awards related to a limited number of shares.

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        The DCF model used to estimate the fair value of our shares is highly sensitive to growth rates, with the principal drivers being the level of internet traffic, our market share, and the size of the online advertising market generally. Additionally, the guideline public company method is highly sensitive to the choice of guideline companies and changes in market multiples of those guideline companies, as well as our company's relative performance in comparison with the selected peers. Changes in these assumptions and drivers resulted in the estimated fair value of our shares increasing from $4.16 per share as of June 1, 2010 to $8.77 per share as of November 3, 2010, as detailed below:

    In early November 2010, the Mail.ru Group Limited ("Mail.ru") completed its initial public offering and listed on the London Stock Exchange. Because it is a publicly traded internet company based in Russia, Mail.ru was included as a guideline public company for purposes of our November 2010 valuation study. Mail.ru's trading multiples were significantly higher than those of other guideline companies. Therefore, the application of the guideline public company method indicated a significantly higher valuation for our company once Mail.ru was included in the analysis.

    Beginning in September 2010 and into the first quarter of 2011, the growth rate in our advertising revenues continued to outperform our internal forecasts as well as the market expectations for growth in Russian online advertising spending. We therefore increased our forecasts for 2011 and future years materially between our June 2010 and November 2010 valuations. Furthermore, due to improved revenue growth prospects in comparison with our peers, our company's classification for purposes of applying the guideline publicly traded company method was upgraded in November 2010, positioning our indicative range in the median to third quartile instead of in the first quartile to the median, as was the case in the June 2010 valuation study.

    In May 2010, we presented an internal revenue forecast to our board of directors that indicated monthly year-over-year growth rates for our revenue peaking in August and then gradually declining through December. We underperformed against this forecast from May through August. Beginning in September 2010, however, our revenues started to outperform our forecast, and our monthly year-over-year growth rates continued to accelerate through December. Based on this trend of accelerating instead of decelerating growth rates, our board approved a 2011 budget in November 2010 that reflected annual revenue growth materially higher than the 2011 growth rate assumed in the June 2010 valuation study.

    In the June 2010 valuation study, our revenue forecasts were cross-checked with online advertising market forecasts published by PwC, noting that our forecasts implied a relatively consistent share of the online advertising market in Russia throughout the forecast period. The forecast indicated that the text-based online advertising market would grow by approximately 28% in 2010. By the end of November 2010, however, our text-based online advertising revenue had grown by over 44%. Additionally, the market forecast indicated declining growth rates for 2011. In light of our performance versus this and other third-party forecasts, as well as our recently adopted 2011 budget, the revenue forecasts for future years in our November 2010 DCF analysis were materially increased.

    A marketability discount in the valuation analyses because our company was not yet publicly traded as of the valuation dates. As a result, our shareholders have had limited opportunities to sell all or part of their shares in our company. To determine an appropriate discount, the valuation study relied on an average strike put option analysis and applied a marketability discount of 17.91% in the June 2010 valuation and 9.56% for the November 2010 valuation. The decrease in the marketability discount between these two dates was the result of our improved IPO prospects. Mail.ru's successful completion of its IPO in November 2010 demonstrated favorable market conditions for IPOs of Russian-based technology companies. Improvements in our growth rates from September 2010 also improved our outlook on our company's future growth prospects. With these developments in view, our board began seriously considering an IPO for our company in 2011 at its November 2010 board

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      meeting. In contrast, in June 2010, we were still underperforming as compared to our internal forecasts, and there was substantial uncertainty regarding the timeline of a future IPO.

    The last transaction in our shares, discussed previously, closed at a price of $4.41 per share in September 2010, prior to the Mail.ru IPO, and prior to our board's consideration of a 2011 IPO. Due to these significant changes in the market as well as in our company's IPO prospects, this transaction was given no weighting in the November 2010 valuation study.

        On May 6, 2011, we, our principal selling shareholders and the underwriters determined a proposed price range for this offering, as set forth on the cover page of this prospectus. The midpoint of the price range is $21.00 per share. In comparison, our estimate of the fair value of our shares was $8.77 per share as of November 3, 2010, determined based on the methodologies and assumptions described above. As we believe is typical in initial public offerings, the price range for this offering was not derived by us using a formal determination of fair value. Rather it was determined based upon discussions between us, our principal shareholders and the underwriters. Among the factors that were considered in setting this range were prevailing market conditions and the long-term prospects for our company and the industry in which we operate. Specifically, we believe that the 139% increase in the fair value of our shares since November 3, 2010 is primarily the result of the following factors, which are listed below along with the estimated percentage increase in valuation implied by making the relevant changes to our DCF model:

    Improved long-term growth prospects (approximately 49 percentage points of the increase).

    Internet users and usage in Russia are fundamental growth drivers in our business. In November 2010, there was no reliable third-party data available on projected growth in the number of Russian internet users. We therefore performed our November 2010 valuation using our best internal estimates of such growth based on historical user growth trends. After initiating our proposed IPO efforts in January 2011, we commissioned FOM to independently forecast internet users in Russia to aid in drafting our prospectus and to demonstrate to investors the current expectations regarding the long-term projected growth in such users in Russia. FOM provided us with its forecast of Russian internet users on February 28, 2011 and made the information publicly available on its website on March 16, 2011. According to the FOM report, the average number of monthly Russian internet users is expected to grow at a year-over-year rate of 11% in 2014. Our best estimate of growth for the same period was 3% in our November 2010 valuation, which resulted in less forecasted growth potential for years beyond 2014 and significantly affected our estimated terminal value. The fact that a reputable third party has published such long-term growth prospects for internet users in Russia supports the use of higher long-term growth rates, which results in a significant increase in the fair value of our shares.

    Recent positive trends in the Russian macroeconomic environment had a positive impact on the valuation of companies operating in Russia. Between November 3, 2010 and May 5, 2011:

        ( ) The price of oil, a key factor in driving growth in the Russian economy, increased by approximately 28%. ( ) The Russian ruble strengthened versus the U.S. dollar by approximately 13%, increasing the value of our dollar-denominated shares. ( ) The MICEX and the RTS exchange index were up by approximately 7% and 20%, respectively.

      In February 2011, our board of directors approved a material increase in 2011 capital expenditures as a percentage of our revenues to take advantage of growth opportunities internationally and in Russia. We expect that the investments in technology infrastructure resulting from this increase in capital expenditures will allow us to effectively manage our long-term growth potential.

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      Recent successful emerging-markets technology IPOs that have been completed since November 2010 support the importance to investors of our improved long-term growth prospects. These offerings priced at the high end of their respective price ranges primarily based on forecasted growth potential instead of near-term earnings estimates, indicating investors' willingness to attribute significant value to long-term growth opportunities.

    Updated long-term business plan to include 2015 (approximately 47 percentage points of the increase).  In February 2011, we updated our five-year plan to include the year 2015. We projected that 2015 would be another year of substantial revenue growth based on the factors discussed above, and we also projected continued profitability improvements in 2015 due to realizing economies of scale on our investments in capital expenditures and personnel costs.

    Increased confidence in our projected revenues (approximately 20 percentage points of the increase).  Our internal projections for text-based advertising revenues prepared by our management and relied on for our November 2010 valuation were higher than publicly available market forecasts. We, therefore, applied a specific company risk premium of 1.5 percentage points as a component of our WACC in our November 2010 DCF valuation analysis. Due to the factors discussed above, there is now less uncertainty as to the achievability of our forecasted revenues. Furthermore, for the period from January 1, 2011 through March 31, 2011, we experienced year-over-year growth in our revenues of 65%, which growth exceeded our budgeted revenues for this period. This revenue growth indicates less uncertainty with respect to our ability to achieve current projections of 2011 revenues. The decrease in uncertainty in the achievability of our forecasted revenues has the effect of removing the specific company risk premium included in the WACC that was applied to these projections in the November 2010 DCF valuation analysis.

    Opportunity for marketability (approximately 23 percentage points of the increase).  The November 2010 valuation assumed a marketability discount of 9.56% whereas the valuation of our Class A shares to be sold in this offering does not provide for any marketability discount as a result of a significant increase in liquidity and shareholders' ability to sell our shares in the public market following the completion of an IPO.

        Based on the $21.00 midpoint of the proposed price range, the intrinsic value of the option awards granted on November 3, 2010 and January 11, 2011, the latest dates we granted option awards, was $30.7 million, all of which related to unvested options. Also based on the $21.00 midpoint of the proposed price range, the intrinsic value of all outstanding options as of March 31, 2011 was $309.4 million, of which $196.2 million related to vested options and $113.2 million related to unvested options.

    Tax Provisions

        Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Effective January 1, 2007, we adopted the new FASB authoritative guidance on accounting for uncertainty in income taxes that requires a two-step approach to recognizing and measuring uncertain tax positions accounted. 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

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estimated amount expensed to date and accrued as of March 31, 2011, 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—Changes in the Russian tax system or unpredictable or unforeseen application of existing rules may materially adversely affect our business, financial condition and result of operations."

        We provide for dividend withholding taxes on 50% of the current year profit of our principal Russian operating subsidiary before we decide on the actual current year distribution because our intercompany dividend policy stipulates distribution of up to 50% of the current net profit for the year to the Netherlands. We consider the remainder of the subsidiary's unremitted earnings to be permanently reinvested outside of the Netherlands. As of March 31, 2011, the cumulative amount of unremitted earnings upon which dividend withholding taxes have not been provided is RUR 7.80 billion. We expect the amount of unremitted earnings to grow as this Russian subsidiary continues to generate net income. We believe the applicable withholding tax rate is 5% and estimate that the amount of the unrecognized deferred tax liability related to these unremitted earnings is RUR 390 million as of March 31, 2011. If we were to subsequently make these unremitted earnings available for distribution to the parent company of our group, then we would be required to record a deferred tax liability on the amount to be made available for distribution. 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."

        In addition, significant management judgment is required in determining whether deferred tax assets will be realized. The 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.

    Recognition and Impairment of Goodwill and Intangible Assets

        The FASB authoritative guidance requires us to recognize the share in 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 and the carrying value of intangible assets 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 business 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. 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

        On January 1, 2011, we adopted the Financial Accounting Standards Board ("FASB") authoritative guidance that expands the required disclosures about fair value measurements pertaining to the presentation of purchases, sales, issuances and settlements in the reconciliation of Level 3 fair value measurements. The adoption of this guidance did not have an impact on our consolidated financial position, results of operations or cash flows.

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        On January 1, 2011, we adopted the FASB authoritative guidance that changes the approach to classification of employee share-based payment awards that have exercise prices denominated in the currency of a market in which a substantial portion of the entity's equity securities trade and this currency differs from the functional currency of the employer entity or payroll currency of the employee. Such awards now should be classified as equity, assuming all other criteria for equity classification are met. The adoption of this guidance did not have an impact on our consolidated financial position, results of operations or cash flows.

Quantitative and Qualitative Disclosures About Market Risk

    Foreign Currency Exchange Risk

        Our revenue and expenses are primarily denominated in Russian rubles. However, as is customary in the Russian real estate market, the majority of our rent expenses, including the lease for our Moscow headquarters, is denominated in U.S. dollars. Additionally, a major portion of our capital expenditures, primarily servers and networking equipment imported by Russian suppliers, can be also materially affected by changes in the U.S. dollar to Russian ruble exchange rate. By keeping most of our cash, cash equivalents and term deposits in U.S. dollars, however, we seek to ensure that we maintain sufficient cash balances to match near-term U.S. dollar denominated liabilities. Unless the Russian ruble experiences a prolonged and significant decline against foreign currencies, we do not believe that we have any material currency foreign exchange exposure in our day-to-day operations.

        In April 2011, we entered into two lease agreements for an aggregate of approximately 11,000 additional square meters of office space located in our headquarters complex in Moscow. These leases have seven year terms and will entail aggregate commitments of approximately RUR 2.1 billion. 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, while we are not protected from any potential appreciation. In the event of a material appreciation of the U.S. dollar against the ruble, we could therefore incur significant additional expense, which could negatively impact our net income and cash flows.

        The functional currency of our Russian operating subsidiaries, which account for the significant majority of our operations, is the Russian ruble. Given that our reporting currency is also Russian ruble, our reported results of operations are only impacted by fluctuations in exchange rates to the extent that we recognize foreign exchange gains and losses on foreign currency denominated monetary assets and liabilities. The functional currency of our Dutch and U.S. subsidiaries is the U.S. dollar. The functional currency of our Ukrainian subsidiary is the Ukrainian hryvnia. The financial statements of non-Russian subsidiaries have been translated into rubles using the current rate method, where balance sheet items are translated into U.S. dollars at the period-end exchange rate and revenue and expenses are translated using a weighted average exchange rate for the relevant period. The resulting translation gains and losses for the years ended December 31, 2008, 2009 and 2010 and the three months ended March 31, 2011, are included as part of other comprehensive income on our consolidated balance sheets. A substantial decline in the value of the U.S. dollar against the Russian ruble could result in translation and foreign exchange losses that could materially adversely affect our reported financial condition and results of operations.

    Interest Rate Risk

        We had cash, cash equivalents and term deposits of RUR 6,728 million as of March 31, 2011. We do not believe that we have any material exposure to changes in the fair value of our cash equivalents and term deposits balances as a result of changes in interest rates. We do not enter into investments for trading or speculative purposes. Declines in interest rates, however, will reduce future investment income.

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INDUSTRY

        The internet is becoming an increasingly significant advertising medium in Russia and the other countries in which we operate. Strong economic growth and the greater availability and affordability of broadband access have led to rapid growth in the number of internet users and websites, as well as the time spent online by users. The internet's mass media reach, combined with its interactive nature and its ability to cost-effectively target audiences, creates new opportunities for advertisers to efficiently reach potential consumers online. We expect these developments, together with increases in total advertising expenditures, growth in e-commerce and growth in the content and services available online, to continue to drive substantial growth in online advertising expenditures in Russia. The global trend toward mobile internet access is also expected to play out in the Russian market, with investments in wireless infrastructure and rising smartphone penetration driving an increase in mobile internet usage and ultimately mobile advertising expenditures.

The Macroeconomic Environment in Russia

        With a population of 140 million and gross domestic product, or "GDP," of $1.38 trillion, Russia was the ninth most populous country and twelfth largest economy in 2010. Russia's nominal GDP experienced a compound annual growth rate, or CAGR, of 15.1% from 2005 through 2010 (in dollar terms) and its real GDP experienced a CAGR of 3.5% over the same period. Average annual disposable income per household grew significantly from $8,038 to $14,089 from 2005 to 2009, according to Euromonitor International. Russia's economy is expected to continue to deliver strong growth, with nominal GDP forecast to rise at a CAGR of 11.1% from 2010 to 2013.


Projected GDP Growth in Selected Countries, 2010-2013

 
  Nominal
GDP growth
(in dollar terms)
 

India

    13.8 %

China

    12.0  

Russia

    11.1  

Brazil

    8.9  

United States

    4.1  

Europe (top 5)*

    3.5  

*
France, Germany, Italy, Spain, United Kingdom, the five largest economies in western Europe by GDP.

        The Russian language is also widely spoken in Kazakhstan and Belarus, where it is the second official language, as well as in Ukraine. We currently operate in each of these countries, which had an aggregate population of approximately 71 million and an aggregate nominal GDP of $310 billion in 2010.

Growth of Russian Internet Audience and Usage

        Bolstered by a strong economy and the growing affordability of personal computers and internet access, the Russian internet market is currently one of the fastest growing in the world. The number of internet users grew at a CAGR of 16.0% from 2005 to 2010, reaching 46 million, according to Euromonitor International, making the Russian internet market one of the largest in Europe in terms of users. The number of internet users is expected to continue to grow at a CAGR of 8.1% from 2010 to 2014, reaching 63 million in 2014.

        Despite significant growth in users, Russian internet penetration is still in its relatively early stages, with the number of Russian internet users aged 18 and older estimated to have reached only 43% of the population aged 18 and older in 2010, significantly lower than the internet penetration in the U.S. or the five largest economies in Europe. The number of internet users in Russia as a percentage of the population

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aged 18 and older is expected to reach 71% by 2014, with robust growth that will place Russia among the world's fastest growing internet populations.


Internet Users, 2010

 
  Projected growth
in number of
internet users
(2010-14 CAGR)
  Estimated number
of internet users
in 2010
(in millions)
  Internet users
as a percentage
of total
population in
2010
 

India

    14.2 %   141     12 %

Russia

    12.5     50     43  

China

    8.5     438     33  

Brazil

    6.4     97     49  

Spain

    4.8     31     65  

France

    4.4     39     63  

Italy

    3.5     33     55  

United Kingdom

    2.7     54     87  

United States

    2.1     233     75  

Germany

    0.8     66     80  

Source: Russia: FOM, March 2011; all other countries, Euromonitor International, December 2010. FOM measures internet penetration as the number of internet users aged 18 and older as a percentage of the total population aged 18 and older. Euromonitor International defines internet users as those using the internet from any device (including mobile phones) in the past 12 months and generally covers users between the age of 15 and 74; in that population, Euromonitor International reports internet penetration in Russia of 33% in 2010.

        We believe that the continued growth of the internet market in Russia is supported by a number of factors, including:

        Economic factors.    Rising disposable income and the increasing affordability of personal computers and internet access are driving broader internet usage in Russia.

        Investments in internet infrastructure.    The Russian internet market is also benefitting from investments in infrastructure, including fiber-optic networks and wireless connectivity, increased usage as a result of faster and cheaper access, and continued growth in the content and services available online. In addition, the Russian government has undertaken several measures to foster internet usage in the country, for example, launching in 2006 a comprehensive program to promote internet usage widely. This program has been focused on providing broadband access in all Russian schools and is aimed at familiarizing children with the internet at an early age. Additionally, an e-government program is currently underway, focused on the provision of government services online.

        Growth in internet penetration in Russia's regions.    Internet penetration varies widely within Russia, with overall penetration in Moscow of 65% in the winter of 2010/2011 according to FOM, compared with our estimated average in the regions of 35%. This disparity primarily reflects the higher per capita income and wider access to flat-rate broadband pricing in Moscow, reflecting greater competition among providers. Users outside Moscow have historically paid for internet access based on the amount of data they download, the time they spend online, or the speed of access. Internet service providers have generally charged higher rates outside Moscow and differential rates for national and local access. Recent trends have seen broadband access spreading in Russia's regions and the cost of access decreasing.

        Rising mobile internet usage.    Mobile internet usage is growing rapidly in Russia despite limited 3G availability in much of the country. 3G services were introduced in many Russian cities during 2009, but launched in Moscow only at the end of 2009. Mobile internet access is sometimes used as a replacement for fixed-line broadband in areas where the latter is not easily accessible. Total data traffic on Russian

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mobile networks was expected to grow at a CAGR of 146% from 2008 to 2010, from 5,800 terabytes to 35,000 terabytes, according to a ComNews review published in May 2010.

        The number of mobile internet subscribers in Russia was estimated to reach 6 million in 2010, and is expected to reach 9 million by 2014, representing 7% of the total population, compared with 58% in the U.S., 25% in China, 40% across the five largest economies in Europe, 13% in Brazil and 6% in India. Unlike in other mobile markets, mobile network operators in Russia generally do not subsidize handset sales, which has contributed to slower adoption rates. Cheaper Korean and Chinese handset alternatives are now becoming popular in the Russian market and are expected to accelerate smartphone adoption.

The Advertising Market in Russia

        The advertising market in Russia grew from $4.5 billion in 2005 to $6.5 billion in 2009 and was expected to grow to $7.9 billion in 2010. Russia is the sixth largest advertising market in Europe and the twelfth largest advertising market globally, according to ZenithOptimedia.


Advertising Expenditures in Russia

 
  2005   2006   2007   2008   2009   2010   CAGR
2005-08
  CAGR
2005-10
 
 
  (RUR in millions)
   
   
 

Offline advertising expenditures

    140,500     177,900     222,800     278,200     196,200     223,200     25.6%     9.7%  

Online advertising expenditures

    2,850     6,200     12,700     17,600     19,100     26,650     83.5     56.4  

of which:

                                                 
 

Text-based

    1,150     3,300     7,000     10,200     11,300     16,850     107.0     71.1  
 

Display

    1,700     2,900     5,700     7,400     7,700     9,800     63.3     42.0  
                                   

Total advertising expenditures

    143,350     184,100     235,500     295,800     215,300     249,850     27.3%     11.8%  
                                   

 

 
  2005   2006   2007   2008   2009   2010   CAGR
2005-08
  CAGR
2005-10
 
 
  ($ in millions)
   
   
 

Offline advertising expenditures

    4,427     5,605     7,020     8,765     6,181     7,032     25.6%     9.7%  

Online advertising expenditures

    100     228     497     708     600     840     92.0     53.0  

of which:

                                                 
 

Text-based

    40     121     274     410     356     531     117.2     67.7  
 

Display

    60     107     223     298     244     309     70.6     38.8  
                                   

Total advertising expenditures

    4,527     5,833     7,517     9,473     6,781     7,872     27.9%     11.7%  
                                   

Source: ZenithOptimedia data for total offline advertising expenditures, April 2011. GroupM data for online advertising expenditures, June 2010, other than with respect to 2010. Online advertising expenditures for 2010 are extracted from the website of the Russian Association of Communication Agencies (AKAR) because GroupM data for 2010 is not available as of the date of this prospectus.
Note: Advertising expenditures include VAT. For offline advertising, Russian rubles converted to U.S. dollars at the rate of $1.00 = RUR 31.7 in 2005-10. For online advertising expenditures, Russian rubles converted to U.S. dollars at the rate of $1.00 = RUR 28.5, 27.2, 25.6, 24.9, 31.7 and 31.7 in 2005-2010, respectively. Totals may not add due to rounding.

        ZenithOptimedia projects that the advertising market in Russia will grow at a CAGR of 23.3% in ruble terms from 2010 to 2013, significantly outpacing the global advertising market, which is expected to grow at a CAGR of only 5.2% over the same period. Russia's higher expected growth reflects the country's relatively low current level of advertising spending per capita and the relatively early stage of development of the commercial advertising market in Russia. Advertising spending per capita in 2010 was $56 in Russia, compared with $488 in the United States, $238 across the five largest economies in Europe by GDP, $66 in Brazil, $17 in China and $4 in India, according to ZenithOptimedia.

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The Online Advertising Market in Russia

        Total online advertising expenditures in Russia, including text-based and display advertising, were $840 million in 2010. This represented approximately 11% of total advertising expenditures in 2010, up from less than 1% in 2005, and compares with 2010 online advertising as a percentage of total advertising expenditures of 29% in the United Kingdom, 18% in France, 18% in Germany, 5% in Italy, 13% in Spain, 20% in China, 15% in the United States, 5% in Brazil and 2% in India, according to ZenithOptimedia. We expect the transition to online advertising to accelerate in the future as advertisers benefit from better reach, targeting and measurement capabilities relative to traditional advertising.


Online Advertising Expenditures, 2010

 
  Online advertising
expenditures
($ in millions)
  Online advertising
as percentage of
total advertising
expenditures
 

United States

  $ 23,082     15 %

United Kingdom

    5,144     29  

Germany

    4,450     18  

China

    4,702     20  

France

    2,334     18  

Spain

    1,097     13  

Russia

    840     11  

Brazil

    608     5  

Italy

    588     5  

India

    121     2  

Source: ZenithOptimedia, April 2011.

        The principal online ad formats currently available in Russia are display and text-based ads.

        Text-based ads consist of textual links that appear either on a search results page based on a user's search query, or on a webpage based on the page's content or on user behavior. Text-based ads are targeted by matching keywords previously selected by an advertiser with a user's search query, the webpage content viewed by the user, or the user's behavior or characteristics. Text-based advertising is generally used to generate sales of specific products or services, and is sold primarily on a pay-for-performance basis. This enables an advertiser to pay only when a user clicks on the ad or, in certain cases, when the user performs a specific action, such as completing a purchase or registering to become a member of a website. Text-based ads were the fastest growing online ad media in Russia over the 2005-2010 period, experiencing a CAGR of 67.2% in ruble terms and significantly outpacing display ads.

        Display advertising consists of graphical ads, such as banners and visual images, which are generally independent of the content of the webpage on which they are displayed, although banners are increasingly being offered on a targeted basis. Display ads are primarily used to increase brand awareness or general demand for particular products or services and are typically priced on a cost-per-thousand impressions, or CPM, basis.

        The Russian text-based ad market grew through the financial crisis at a CAGR of 27.1% in ruble terms over the 2007 to 2009 period. The text-based ad market is expected to experience accelerated growth in the medium term due to a number of factors, including its ability to generate real-time and measurable results for advertisers, its suitability for location-based advertising and its attractiveness for the growing number of small and medium-size businesses in Russia seeking to conduct online advertising campaigns.

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Mobile Advertising

        The rapid growth in mobile internet usage is driving a significant uptake in mobile advertising. Advertising on a personal mobile device that has "always-on" internet connectivity and can provide information about the user's location is an attractive value proposition to advertisers, as they can target consumers with relevant, personalized and location-specific information.

        Global mobile advertising spending is expected to experience a CAGR of 25.9% growing from $11.5 billion in 2010 to $28.9 billion in 2014, according to Wall Street Research. Russian mobile advertising spending is expected to experience a CAGR of 52.8%, from $9 million to $21 million for the period 2010 to 2012, according to Starcom MediaVest Group. Search, as an important entry point to the web from mobile devices, is well positioned to benefit from the expected surge in mobile internet usage and adoption of mobile advertising by marketers.

e-Commerce

        The business-to-consumer and business-to-business e-commerce market in Russia is forecast to grow at a CAGR of 24.2% from 2010 to 2014, reaching $42.3 billion, according to IDC. We believe we will benefit from increasing e-commerce volumes. Price comparison sites are increasingly used by consumers as gateways to retail e-commerce, as they enable consumers to select the most suitable product and retailer based on specific criteria and recommendations from other users at the most competitive prices.

Conclusion

        Overall, we believe that our industry presents attractive growth prospects for a number of reasons, including the following:

    the Russian economy is expected to continue to grow faster than more developed economies

    Russian internet penetration significantly lags that observed in more developed countries, and is expected to increase at a faster rate

    mobile internet penetration and smartphone adoption rates are increasing in Russia, and search and location-based services are well-suited for mobile applications

    the Russian advertising market has been growing faster than both the global advertising market and the overall Russian economy, and these trends are expected to continue

    the Russian online advertising market is expected to continue to outpace both the global online advertising market and the overall Russian advertising market

    text-based advertising continued to grow during the economic downturn and is expected to grow strongly in future periods

    e-commerce is growing, with search being a major facilitator of online commerce

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BUSINESS

Our Business

        We are the leading internet company in Russia, operating the most popular search engine and the most visited website. In 2010, we generated 64% of all search traffic in Russia and were the largest Russian internet company by revenue. In March 2011, our yandex.ru website attracted 38.3 million unique visitors. We also operate in Ukraine, Kazakhstan and Belarus. Our mission is to answer any question internet users may have. To that end, we utilize our capabilities in applied mathematics and data analysis and our in-depth knowledge of the languages, cultures and preferences of internet users in our markets to develop advanced search technology and information retrieval services. We also aggregate and organize extensive local, national and international content and offer a broad range of additional services. Our search and many of our services are location-based and are available in versions tailored for mobile and other digital platforms and devices.

        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 founding 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. Our users are our first priority, and we are committed to advancing our technology to continuously improve their internet experience.

        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 local search results in more than 1,400 cities. 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 news, shopping, blogs, images and videos. Our blog search also includes feeds from leading blog hosting and social networking sites in Russia, including LiveJournal, Vkontakte and Facebook. We offer convenient access to our search engine through personal computers, mobile phones, tablets, and navigation and other digital devices. We also offer a wide range of specialized search, personalized and location-based services, including Yandex.News, Yandex.Market, Yandex.Mail and Yandex.Maps.

        Our homepage, which attracted 24.7 million unique visitors in March 2011 according to TNS, 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. Our homepage can easily be customized by users to address their individual interests.

        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 principally consists of graphical ads that appear on specific webpages. Our ads are clearly marked and separate from our organic search results and from the content of the webpages on which they may also appear. We do not serve intrusive ads, such as "pop-ups," that might detract from our users' experience.

        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 more than 127,000 advertisers in the first quarter of 2011 compared with

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92,000 in the first quarter of 2010, 180,000 advertisers in the full year 2010 and 131,000 in the full year 2009, including many small and medium-sized businesses throughout Russia and the other countries in which we operate.

Competitive Strengths

        We believe that we benefit from the following key strengths:

        We are the internet market leader in Russia.    We captured 65% of internet search traffic in Russia in the first quarter of 2011, up from 64% in 2010, 57% in 2009 and 55% in 2008, according to Liveinternet.ru, and our yandex.ru website attracted 38.3 million unique visitors in March 2011, according to comScore. We believe that our market position, strong brand and continuous innovation enable us to attract increasing numbers of users, advertisers, and ad network partners. We have also leveraged our search technology and expertise to expand outside of Russia into Ukraine, Kazakhstan and Belarus. We believe our market leadership allows us to play a pivotal role in the development of the Russian internet ecosystem. We provide users with access to content and services, drive web traffic to third-party websites, and facilitate web monetization through targeted, cost-effective online advertising. We believe that we are well positioned to capitalize on the growth of internet usage and online advertising in Russia.

        We are at the forefront of search and information retrieval technology.    Our founders have been actively engaged in the development of search technology for more than 20 years. We utilize linguistics, mathematics and statistical analysis to develop proprietary algorithms that efficiently extract, compile, systematize and present relevant information to users. We draw upon our deep technological expertise and our team of more than 1,400 engineers and developers to improve our search capabilities and introduce innovative services. For example, in 2009 we launched MatrixNet, a new method of machine learning that significantly improves the relevance of our search results. We develop our key technologies in-house and opportunistically acquire technologies and teams that we believe can help to enhance our offerings.

        We deliver best-in-class user services.    Our users are our first priority. Their needs govern the development of our services and the design of our webpages, and we do not compromise their experience to maximize revenues. To improve the user experience, we continuously seek to enhance our technology to ensure the relevance of our search results and to introduce new and improved services and features, including mobile and location-based services. In our maps service, for example, we offer real-time road traffic congestion monitoring, the most popular service of its kind in Russia, as well as a variety of tools to enable users to get information about local businesses and points of interest. We also seek to ensure the speed and reliability of our services regardless of the user's location by operating our own network of data centers in major cities throughout Russia and the other countries in which we operate. We believe that our focus on the user helps to maintain strong brand loyalty, which serves to further increase demand for our services.

        We have a proven track record of monetization.    We have been profitable every year since 2003 and have proven our ability to monetize our large and rapidly growing user base. The growth in our users and advertisers and our ability to deliver relevant search results have driven compound annual revenue growth of 66% from 2006 through 2010. We are focused on developing tools that will continue to enhance our monetization, including more advanced ad formats and more location-based and targeted advertising across digital platforms and devices. For example, in January 2011 we launched our Geo-Direct Business Directory service, which 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.

        We attract and nurture world-class talent.    At the heart of our company are world-class competencies in applied mathematics, programming and distributed computing. With our principal development facilities located in Russia, we believe that we are better able to attract local talent than some of our global

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competitors because our employees feel closer to the center of our operations. We also actively contribute to the advancement of information search and retrieval, computer science and mathematics in Russia. Our initiatives include the Yandex School of Data Analysis, which we founded in 2007 and from which we recruit developers; Yandex.Start, our program to support start-up businesses through which we seek to foster innovation and identify potential new partners and team members; and our sponsorship of educational competitions, including math and computer science Olympiads. We also seek to recruit talent worldwide as opportunities arise, as we have done with teams in Silicon Valley and Ukraine, for example.

Our Strategy

        Our mission is to answer any question internet users may have. We seek to structure and make easily accessible the wealth of content available on the internet, as well as to actively expand the scope and usefulness of that content. To fulfill our mission, we intend to:

        Continuously enhance our users' internet experience.    We are committed to using our technology to continuously improve the quality and breadth of the services we offer in order to enhance our users' internet experience. We intend to continue to enable users to find relevant information more efficiently, including by improving our search algorithms, increasing the size, quality and freshness of our web indexes, and actively creating, collecting and processing real world information to make it available online. We also plan to continue to develop and introduce new services, features and functionalities that address our users' needs. We believe that by providing the best experience we will continue to attract a large and loyal audience.

        Continue to develop services for mobile and other digital platforms and devices.    To be able to provide answers whenever and wherever our users need them, we are making our services accessible on all popular digital platforms and devices, including cellular telephones, tablets, internet-connected TVs and navigation devices. We have introduced mobile versions of many of our services and offer downloadable applications for the most popular mobile platforms and devices. Less than 5% of our total traffic currently accesses our services through mobile devices, which we believe indicates potential for significant growth. We intend to build on existing offerings to introduce new and improved mobile and location-based services. For example, we recently entered into an arrangement with BMW to pre-install a number of our services, including Yandex.Maps, Yandex.Traffic, Yandex.News and Yandex.Weather on the on-board computers in certain car models in Russia, and will continue to actively look for similar opportunities to expand our mobile reach and the range of digital platforms and devices we can serve.

        Further leverage our broad base of users, advertisers and ad network partners to drive monetization.    We believe we can most effectively monetize our services by focusing first and foremost on the user. We intend to utilize our technology to continuously improve the relevance of our search results and offer new ad formats, including increasingly targeted and location-based ads, which we believe will increase our revenues. We also intend to leverage our leading market position to strengthen and extend our relationships with advertisers, advertising agencies and distribution partners, and to selectively grow the Yandex ad network. We believe that by increasing our reach, we will be able to drive further monetization.

        Expand our presence in our current markets, while considering selective expansion into additional geographies.    We intend to increase our share of advertising in the markets in which we operate by continuing to enhance the relevance of our search results and other services and tailoring them for local markets. We believe we can drive further revenue growth, especially from small- and medium-size businesses, by developing more location-based services that enable advertisers to conduct more geographically targeted ad campaigns. We also actively explore opportunities for geographic expansion, and intend to deploy our technology, infrastructure and expertise to move into additional countries where we believe we can establish a competitive advantage. We plan to direct a material portion of our planned 2011 capital expenditures to support such efforts.

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        Increase the scope, accessibility and usefulness of content on the internet.    We are devoted to the development of the internet as the resource for information, both by enhancing the structure of available content and through continued aggregation and creation of new content. We believe that increasing the scope, usefulness and accessibility of content will help to improve the quality of the answers we provide and lead to further adoption of our services. In pursuit of this goal, we make many of our technologies freely available to any third-party developers in the form of application program interfaces, or APIs, to enable them to easily make information available and accessible online. In addition, we recognize the growing importance of online social networks, and are actively working to improve the accessibility of their content by making it available to our search users through data sharing arrangements with such networks. As a market leader, we benefit from increased internet usage, which we believe serves to attract larger advertising budgets online.

        Maintain a talented workforce and a creative and participatory culture.    We place a high value on technological innovation and a strong emphasis on nurturing talent. We actively recruit and develop talent both internally and externally through our support for data analysis education and our relationships with start-up companies. We believe that we have created a dynamic and non-hierarchical work environment that encourages teamwork, brainstorming, creativity, innovation and individual contribution. We believe in providing incentives to maximize company performance, including granting share options to almost 10% of our workforce to date—a practice that is relatively uncommon in Russia. We also selectively acquire and integrate businesses with teams of experienced developers. For example, we recently acquired GIS Technology, the company that provides content for our maps, with a team that will help us to strengthen our location-based offerings. We also seek opportunistically to recruit talent in other geographies, for example by launching Yandex Labs in Palo Alto, California, with the objective of fostering further innovation in search and advertising technology. As we continue to expand our workforce, we are committed to maintaining the positive aspects of a start-up environment to ensure continued innovation and flexibility.

Our Services for Users

        We offer a broad range of 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. The principal types of services we offer to our users include search, location-based, personalized and mobile services, including the following:

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Yandex Search
    Our core search engine

Specialized Search Services
    Yandex.News
Yandex.Market
Yandex.Image
Yandex.Video
Yandex.Catalog
Yandex.Weather
Yandex.Music
Yandex.Dictionaries
Yandex.Afisha
Yandex.TV
Yandex.Blogs
Yandex.Timetables
Yandex.Jobs
Yandex.Auto
Yandex.Real Estate

Maps and Location-based Services
    Yandex.Maps
Yandex.Traffic
Yandex.Metro
Yandex.Panorama
People's Map
  Yandex Homepage
    Gateway to our search and services

Email and Personalized Services
    Yandex.Mail
Yandex.Fotki
Narod
Yaru Blogs

Mobile Applications and Services
    Mobile versions of services at m.yandex.ru
Applications such as search for mobile, as well as maps, email and photos

Desktop Applications
    Punto Switcher
Yandex.Bar
Ya.Online

Server Applications
    Yandex.Server
Yandex.Spamooborona

    Yandex Search

        Our search engine offers almost instantaneous access to the vast range of information available online. 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 antispam 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.News, Yandex.Market, Yandex.Maps, Yandex.Music, Yandex.Image and Yandex.Video. Yandex search is responsive to real-time queries, recognizing when a query requires the most current information, such as breaking news or the most recent post on Twitter on a particular topic. We constantly measure and monitor key parameters of our search to assess and ensure its quality. Based on our internal statistics and analysis of our own and competitors' services, we believe that our search consistently demonstrates high quality in areas such as navigational search for specific webpages, spell checker precision, location of original source documents, low level of spam returned, and the size and comprehensiveness of our index.

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        Additional key features of our search results page are:

    Wizard Answer, a tool that analyzes and categorizes user queries in order to provide the correct answer where there is only one correct answer, such as flight arrival times, movie schedules, sports results or foreign currency conversions;

    Spell Checker, a feature that uses machine-learning to correct spelling errors, including automatically correcting between the Cyrillic and Latin alphabets;

    Autocomplete, a feature offering as-you-type suggestions, complemented with direct links to websites where relevant, to help users enter queries more efficiently and define searches more precisely;

    Antivirus, which detects pages that contain or link to malware or viruses and warns users about potential threats;

    Enhanced Snippets, which enables users to quickly see the most important information by allowing webmasters to provide us with input that lets our search engine automatically extract the most relevant points from their sites and present it to users in a useful format on our search results page;

    Fast Links, which offers direct links to the most popular pages of a particular website; and

    Related Queries, which offers alternative ways of formulating search queries to improve results.

        All of these features allow us to produce high-quality, highly relevant search results, which we believe ensures an excellent user experience and helps us attract and retain users. We also offer a number of specialized search features, including Advanced Search, allowing users to enter more detailed and customized queries; My Findings, allowing registered users to store and manage their Yandex searches and viewed websites; Family Search, our most restrictive search filter, allowing users to filter explicit images and text to provide a child-friendly online environment; and Search for the Visually Impaired, our interface featuring larger fonts and adjusted for better audio output.

        In 2010, we launched yandex.com, our platform for beta testing and improving non-Russian language search. We seek to enhance our search capabilities by regularly expanding our algorithms to process additional languages, including most European languages, and our index of international webpages.

    Yandex Homepage

        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, and other services. In March 2011, our homepage had 24.7 million unique visitors, compared to 22.7 million for Mail.ru's homepage and 7.3 million for Rambler's homepage, according to TNS. According to a TNS survey in Russia in late 2010, 44% of users had selected yandex.ru as their default homepage, compared with 17% for mail.ru and 9% for google.ru.

        We enable users to easily customize our homepage in light of their personal interests. Users can select from more than 8,000 third-party and proprietary "widgets" (add-on web applications) to add to our homepage. Our widgets allow users a range of options including viewing their Facebook, Vkontakte or Twitter accounts, following global or regional news, seeing road traffic updates for their city or for personalized travel routes, accessing frequently used online games and receiving email alerts from their Yandex.Mail inbox. Users can also personalize the language, design and color themes for the homepage, as well as remove any content, including banner ads, other than the search box. Roughly one out of every five Yandex users chooses to customize the Yandex homepage.

        We also offer ya.ru, a "light" version of our homepage, which contains only a search box. Approximately 1% of Yandex's searches are currently served via ya.ru.

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        We also offer localized homepages for specific geographic markets. We launched our Ukrainian homepage yandex.ua in 2005, our Kazakh homepage yandex.kz in 2009, and our Belarusian homepage yandex.by in 2010. Yandex automatically detects users' locations based on their IP addresses and defaults to the relevant local homepage. For these localized homepages, we do not simply crawl the web for local content; the content we provide through these sites, such as news, is generally obtained through agreements with reputable local partners. We are focused on providing an increasing amount of content in the local language and believe that we provide better support for local language search in these markets than our competitors. According to our internal statistics, in March 2011, yandex.ua had 14.4 million unique users, yandex.kz had 2.4 million unique users, and yandex.by had 3.0 million unique users.

    Specialized Search Services

        In addition to our core search engine, we offer the following specialized search services:

        Yandex.News.    Our news aggregation and information service, providing a comprehensive media overview for our Russian and Ukrainian audiences, aggregating and presenting local, national and international news, currently from more than 3,700 news sources worldwide. The selection of news is fully automated and neutral from an editorial perspective. Our news page is assembled automatically and uses our "facts extraction" technology to present a story summary with the most relevant information compiled from various sources, as well as a map of the relevant location and automatically assembled "press portraits" of the key people and parties involved. We also present news stories in our search results pages, when relevant. We currently have "content-for-traffic" agreements with most of our news content providers in Russia and Ukraine, through which we obtain the right to use content for free in exchange for directing traffic to the providers' websites.

        Yandex.News is the most visited online news aggregation service in Russia, with 11.6 million unique visitors during March 2011, compared to 9.6 million for Mail.ru's news service and 6.5 million for RBC.ru, the news service of RosBusiness Consulting (RBC), according to comScore. The average daily audience of Yandex.News was approximately 1.6 million during March 2011 (not including users who read news summaries on our homepage), compared with 1.4 million for Mail.ru's news service and 618,000 for RBC's news service, according to comScore.

        Yandex.Market.    Our price comparison service providing product information, price comparisons and consumer-generated reviews of products and online retailers. We aggregate price, product and availability information from more than 6,000 active online and "brick-and-mortar" retailers, and currently feature more than 130 product categories and more than 500,000 product makes and models. Each participating store is required to have an individual product page with a product description, a shopping basket feature or other ability to one-click check-out and an image of the product, helping us to ensure the quality of service, save user time and improve user experience. The service also includes product descriptions compiled by our staff and a selection feature allowing users to find the most suitable product based on certain features. The service prioritizes offerings from shops that ship to the user's location. For users who are unsure about the specific product characteristics they are looking for, we offer our automated Q&A expert system, "Guru," which helps users narrow down their search by helping to identify their needs. Yandex.Market enables users to post comments and ratings on the quality of service of participating e-shops, as well as on the quality and usefulness of particular products. Through our quality control efforts, we seek to ensure compliance with our product and service standards before retailers are admitted to the system, and periodically monitor compliance with these standards. We aggregate information in a neutral manner and do not operate our own e-shops and do not feature any affiliated e-shops.

        Yandex.Market is the most popular online price comparison service in Russia, with 6.0 million unique visitors in March 2011, compared with 2.2 million for Mail.ru's shopping service, according to comScore.

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The average daily audience of Yandex.Market was approximately 462,000 in March 2011, according to comScore.

        We offer a Yandex.Market mobile application that allows users to scan product bar-codes in-store to receive product information, price comparisons, customer reviews and online availability information. It also recognizes telephone numbers in the retailers' listings, and allows mobile users to place calls directly to participating Yandex.Market retailers from within the mobile application.

        Yandex.Image Search.    Our image search service, which allows users to search our index of more than 3.8 billion images. Users can search our image database by using specific keywords as