Venture investment volumes in Russia fell 42% as the number of completed deals dropped 38% in Q1 2014, says Rye, Man and Gor Securities (RMG), an independent Moscow-based investment company, in their latest quarterly report published with the participation of East-West Digital News.

In what appears to be a new low for at least the past two years, transaction volume reached just $109 million last quarter, down from $187 million in Q4 2013.

The Internet and other IT sectors continued their dominance, securing 56% of the total amount invested.

The number of exits also decreased sharply: “There were just seven exits worth a total of $49 million, and most of the value was in one large transaction (Sergei Kalugin sold a large block of shares of WebMediaGroupfor $40 million dollars). The negative development is explained by an almost total lack of exit funding by private funds in Q1,” RMG analysts found.

venture trends Q1 2014_by RMG

The report, nevertheless, highlights several positive points: “The Russian government maintained its support for early-stage technology companies; new venture funds continue to appear (including the first venture funds in Russia to be set up under investment partnership agreements); and co-investment developed further,” notes RMG Corporate Finance Director Arseniy Dabbakh.

Two worrying trends

Surely the decrease of early 2014 – which followed last year’s slow down – does not necessarily reflect a real market contraction. After all, had Ozon’s $150 million round of financing in April taken place a few weeks earlier, analysts would have reported the triumphant growth of Russia’s venture market in the first quarter of this year.

However, in a discouraging domestic macroeconomic context, two emerging trends will do nothing to help the venture market recover.

Current international tensions and Russia’s growing isolation have undeniably affected Russia’s image on the global venture scene. Not all the funds are concerned, as evidenced by Wikimart’s recent discussions with Western VCs, but the “Russia” label has become a non-starter for many investors.

The second trend is about Russian funds. Certainly, the development of the domestic venture industry has not stopped, with existing funds increasing their capital and new funds still appearing on the scene, – but these Russian (or Russia-based) funds are directing a growing portion of their investment to foreign countries. Californian startups remain their favorite targets, but more and more Russian money is now being invested in Israel, Europe and increasingly South-East Asia.

While not new, this invest-abroad trend seems to have accelerated over the past few months. While Flint Capital is preparing to invest in 10 Israeli startups, Buran Venture Capital has just announced the extension of its mandate to Central Europe and Spinup Partners is investing in Singapore incubators.

FinSight Ventures, a new Russian fund incorporated in Bermuda, has just launched with a focus on North America, Southeast Asia and Africa.

Meanwhile, state-owned funds are likely to remain a stable anchor to support Russian innovation. Among other institutions, FRII, a $200 million seed-stage Internet fund launched last year, and Skolkovo, the international tech hub under construction on the outskirts of Moscow, remain active in the market.

Please click here here to download the full report.

This story originally appeared on East-West Digital News.