Property Rights, Russian Customs and Monopolies

I can still recall the Soviet Union of the late 1980s and early 1990s, when the majority of Russians regarded goods produced in their own country with mostly mixed but almost entirely negative feelings, covering an entire range between silently suffering tolerance and outraged disgust. We forget about it now, but the Soviet Union was responsible for offering its citizens Bizarro-world consumer wonders, such as exploding color television sets, five-gallon glass jars of pickled squash and tins of inedible mystery meat (the dreaded tushonka). Staples like meat, cheese and cooking oil were parceled out to families by redeemable coupons (taloni). Defesit (shortage) was the biggest word in the Soviet lexicon, and people didn’t ask each other where they bought something, they asked ‘gde dostali?’ (Where did you get a hold of it?). Back then, street gangs made a fortune trading in anything and everything imported – blue jeans, baseball caps, chewing gum, shampoo, deodorant, music and VCR tapes. They fueled a booming underground economy that equaled the official Soviet GNP and gave rise to a deep and abiding respect among Russian consumers for all things imported. It is no wonder that Russian consumers in 2009 are the most brand-conscious in the world.

Russia in the modern world is a country of avid consumers; the social compact between the Putin and Medvedev administrations gives citizens the freedom to travel and consume, and a measure of security and stability, in exchange for Kremlin and oligarch control over resources and profits. The bargain extends into the world of foreign trade, where the Russian Federal Customs Service brings in over 40% of the annual state budget through the collection of duties and taxes on imports and exports. Russia’s appetite for foreign goods has slowed down in step with global economic distress but it is a sure bet that once the economy turns around (and fuel prices rise to their mid-2008 levels), Russia will begin to import western consumer goods with the same enthusiasm as they have for the past decade.

Western brand name goods are among the most popular imports to Russia, and western companies – together with the Russian government – are going to great lengths to protect the trademarks and copyrights of major corporations. The promulgation of the Customs regulation, “The Regulation on protection of intellectual property rights by customs authorities” pushes a large share of enforcement squarely onto the Federal Customs Service and gives them broad authority to halt shipments of suspected contraband, unlicensed, or unsanctioned goods at the Russian border. A tough law, and tough enforcement, the logic goes, forces counterfeiters out of the market by forcing them to either go legitimate, or get apprehended.

This may very well be the long-term effect, but the short-term effects may be entirely different; this being Russia, the only surety is improbability and logic has its own set of special rules. Consider this comment by the Russian newspaper Noviye Izvestiya:

“Businessman-importers help Russia integrate into the worldwide system of consumerism, make connections, and tie the economic elements of the market to business methodologies little-known to those brought up in a planned economy.

“But only for a certain period of time. A desired-for equilibrium cannot exist for long in Russia’s wobbling, difficult balance. The market for brands is an example. It is not a matter of shoot-outs with machine guns or single-shot snipers delineating the parameters of profitable territory – this is my territory, and this is my territory, too. Thank God, the players are on a different level. That said the arsenal of measures and actions available to destroy the competition are not insubstantial.

“Episodes from this brutal struggle began to appear when new players began to show up in the Russian brand-name import market alongside the large, powerful companies created 6-8 years ago. The new ones entered the market, one after the other. Young, ambitious wolves who wanted to exercise their legal right to work at importing brand names. But at the time all of this began, the big companies (which started up the piquant business of flooding the nation with alcohol and other well-renowned addictive substances), strengthened not only economically, but also socially. The gained a well-deserved authority among brand-name producers and wholesalers in the West. They secured for themselves certain exclusive rights that, it is true, are completely inexplicable for even the most progressive advocates of the market. Finally, they cultivated well-placed connections and associates inside of the country, which for Russia was, is, and will always be the most important thing.

“Waking up one fine day to find all sorts of competitors in small companies and cooperatives, which following the enactment of laws on competition, spread throughout the country like mushrooms after spring rain, this group of persons, buddies of the brand market, didn’t wait long to take action. And they didn’t have to invent ways to crush the competition: the immortal telephone rules, intertwined state and commercial structures, legal traps and other well-honed tricks, were arts not lost to them.

“Inspection agencies of all different kinds were set loose on an inconvenient company. It is a well-known fact that the number of inspection agencies in Russia long ago surpassed the number of actual persons. Inspection agencies paralyzed a company’s work, upset delivery schedules for goods, and turned the pockets of any who resisted inside out. Men in black masks descended on warehouses in sudden raids. This happened with a company importing Nescafe brand products. Its goods were illegally removed from all of its warehouses all at once, and held without explanation for over a month in conditions that destroyed the product. The whole time the company lost business with stores where the coffee was sold in accordance with absolutely legal documents. But the empty shelves didn’t sit bare for long; they were filled with deliveries of coffee provided from the same people, who ordered the raids. Examples from Moscow of this sort are unbelievable – once, over a six-month period, the Federal Customs Service opened and closed for an inconvenient company many times. They closed for a month. Then opened a month later. Then closed again. Then opened again. Then closed…the goods shelf life expired, they were spoiled, contracts among partners lost all meaning, and the company closed. While another one prospered.”

While protecting western trademarks and brand names is important, the article suggests strongly that this is done in Russia at the expense of fair competition among businesses, to the benefit of only the well connected. And from my previous blog, it is clear that the FCS needs very little justification to stop, arrest and confiscate a shipment of goods under the pretext that they are counterfeit, or imported without permission of the trademark holder.

How should western brand-name companies respond? They spend billions on researching, developing and bringing their brands to market, and have the right to protect them. At the same time, does a brand name business do the right thing, if by protecting its intellectual property, it deprives a small businessman of his livelihood, and promotes market monopolization in Russia?