Liberalizing Parallel Imports in Russia – Clashing Views

The liberalization of parallel imports in Russia has been widely discussed and debated in recent years. In 2009, Russian competition regulator, the Federal Antimonopoly Service (FAS), started calling for the liberalization arguing that it would allow for competition among sources of the same or similar goods and thus reduce prices of imported goods by approximately 15 percent. On the other hand, the opponents of liberalization have been arguing that it would increase the amount of counterfeit goods and negatively affect the country’s economy, i.e. make Russia less attractive to investors and damage its domestic production.

The Porsche Cayenne Case and its Consequences

The FAS’s initiative to remove restrictions on parallel importing had an impact on a 2009 case involving Porsche Russland, the exclusive importer and owner of the Porsche and Cayenne trademarks, and Genesis, the Russian company that imported a Porsche Cayenne car into Russia.

Until this case, the courts efficiently combated parallel imports by treating the products imported into Russia without rights holders’ consent as counterfeits, in accordance with Article 14.10 of the Russian Code of Administrative Offenses (illegal use of trademark). The customs or police authorities initiated administrative cases, and the court practice was to order the seizure and destruction of goods and to impose fines on infringers.

However, in the Porsche Cayenne case, the Supreme Arbitration Court set a precedent by ruling that there was no illegal use of trademark, as it was not a counterfeit car. The court stated that the rights owner could not seek protection on the basis of the Russian Code of Administrative Offenses but file a civil claim for trademark infringement on the basis of the Russian Civil Code provisions.

The fact that civil cases last longer than administrative cases did not prevent rights holders from seeking protection from parallel imports and, as a result, in the recent few years there have been a number of trademark infringement cases that resulted in prohibition of parallel imports and compensation for damages, under the provisions of the Russian Civil Code.

For instance, in November 2011, the Arbitrazh Court of Saint Petersburg and the Leningrad Region ruled in favor of the luxury watchmaker Longines Watch Co. Francillon Ltd., part of the Swatch Group, in a parallel import case against the Russian online shop Bestwatch.ru and the website administrator Adelia. The court prohibited the online shop from offering Longines watches for sale and awarded a record amount of compensation in Russia for the infringement of trademark rights by an unauthorized importer. Namely, Longines demanded maximum compensation for damages, which according to the Russian Civil Code is approximately EUR 115,000 (USD 159,000), and this request was partially sustained by the court, which awarded compensation in the amount of approximately EUR 69,000 (USD 95,000).

FAS – The Main Advocate for Liberalization

In recent years, the FAS has been pushing to legalize parallel import by amending the Article 1487 of the Civil Code. The FAS Deputy Head Andrey Kashevarov revealed this summer that the FAS is preparing draft amendments in order to substitute the current principle of regional exhaustion of rights with the principle of international exhaustion of rights. The regional principle in Russia is based on the Customs Union (CU) of Belarus, Kazakhstan and Russia.

According to the regional principle, other parties are allowed to sell protected goods only with the permission of the rights owner. Generally, many European countries go by this principle, thus prohibiting parallel imports.

Under the international principle, the IP rights are exhausted once the product has been sold by the IP owner, or with his consent, anywhere in the world. Countries such as the US, Great Britain and Canada go by this principle, thus permitting parallel imports.

The FAS also intends to amend Article 14.1 of the Federal Law on the Protection of Competition in order to make the refusal of the rights owner to permit other companies to import genuine goods into Russia an act of unfair competition.

Opposing Views

Several opponents of parallel imports sent an official request to the First Deputy Prime Minister Igor Shuvalov asking him to reject the FAS’s draft amendments, which in their opinion would restrict trademark owners’ rights and have other negative consequences. The opponents included the Russian Association of Branded Goods Manufacturers (RusBrand) and Commodity Producers of Electro Household and Computer Technics (RATEK).

Alexey Popovichev, the CEO of RusBrand, argued that the IP legislation adopted in Russia in the last 10 years complies with international standards and Russia’s WTO obligations and has led to a significant reduction in counterfeits.

Russia’s Ministry of Economic Development, Ministry of Industry and Trade as well as the Federal Service for Intellectual Property (Rospatent) oppose the draft amendments arguing that they may increase the amount of counterfeit goods.

Study Highlights Negative Consequences

The Association of European Businesses (AEB) recently presented results of a study they initiated in order to analyze the financial risks and socio-economic consequences of parallel imports liberalization in Russia. The study involved interviews with 34 senior management members of leading companies from various industries and countries. The respondents generally expressed the opinion that parallel imports liberalization would negatively affect the Russian economy.

Most respondents indicated that parallel imports liberalization would reduce the profitability of their business or the business of their importer, due to the unfair intra-brand competition in the import market. Seventeen out of 34 respondents said that this would lead to a decrease in foreign investments and four respondents even said that they would completely halt their investment plans.

Other identified risks include a decrease in domestic production, part of which would be replaced by imports, including parallel imports. This would lead to job losses, particularly in the tire, automotive components and equipment maintenance industries.

Another risk is a possible depreciation of the Russian ruble. Currently retail networks purchase goods from Russian representatives of foreign companies, carrying out calculations in Russian rubles, while in case of parallel import liberalization, they would buy and import independently from abroad, that is become parallel importers. They would have to buy large amounts of currency to purchase the goods abroad and the Central Bank of Russia would need to increase foreign currency reserves.

According to some experts, the liberalization would not lead to a decline in retail prices, but only in the wholesale prices, which would not greatly affect the consumers. The quality of service may also drop because parallel importers would not be interested in developing the relationship between consumers and brands.

Finally, the respondents suggested that the independent importers would possibly revert to shady schemes and corrupt practices such as tax avoidance and fraud.

Not until 2018?

While timeframes for the potential introduction of parallel imports vary, at the recent meeting of the Foreign Investment Advisory Council, First Deputy Prime Minister Igor Shuvalov stated that it would occur in stages and not earlier than 2018.

“If this should happen, it would be no earlier than 2018-2020 and with consideration of investors’ interests so that they are sure there are no threats to their investments,” Shuvalov said and added that “five-six years is a reasonable period during which a return on investments can be derived.”

The FAS may propose partial legalization of parallel imports, particularly leaving the ban for products that are manufactured both in Russia and abroad, in order not to violate agreements with companies that have their production plants in Russia.

The FAS has proposed legalizing parallel import in the entire CU territory. The Eurasian Economic Commission (EEC) plans to initiate a study about the potential impact on the CU member countries.

By: Sitora Rakhmanova

For more information, please contact Sitora Rakhmanova at our Russia office.