Feature

Consumer Fakes

Fighting a Losing Battle

Russia is awash with consumer fakes, from Nike trainers to Fender guitars, and the people who buy them cannot get enough, while the state is losing an officially estimated billion dollars a year in tax revenues. Russia is one of the black spots targeted by the International Intellectual Property Alliance. In testimony this May before a US House of Representatives subcommittee, the IIPA described Russia’s current copyright piracy problem as “enormous”:

The IIPA estimated that the copyright industry lost over $1.7 billion due to piracy last year, and over $6 billion in the last five years in Russia. “Piracy rates hover around 70% of the market or higher for every copyright sector,” J. Schwartz, Vice President and IIPA Special Counsel said.

He noted that when piracy was first identified as a problem in 1996 there were two optical disc (CD/DVD) plants in the country. Now there are at least 34.

Russia’s annual manufacturing capacity now stands conservatively at over 370 million CDs and additionally over 30 million DVDs; while demand for legitimate discs is unlikely to exceed 80 million in all formats, he claimed.

The man in the Moscow hot seat, Alexey Ugrinovich, Director of the three-year-old National Federation of Phonogram Producers (NFPP), which represents 70% of the music industry in Russia and unites the major Russian and international record companies, paints an even bleaker picture for his industry. “65% of the total market is pirate CD’s,” he told Passport magazine. He estimates the total volume of the legal music market is between $300 mn and $500 mn.

Of the pirate copies 70% are from international catalogues and 30% are Russian artists.

He notes a huge difference between Moscow and other regions of Russia. “In Moscow, with the help of the city government, the market share of pirate music is down to 40%-50%,” he noted. While in the regions, “the pirates rule,” he acknowledged. In cities such as Rostov or Novossibirsk, “you cannot find legitimate music albums. Even the big record shops have to sell pirated versions.”

Since 2001 the international music industry led by Sony and BMG introduced ‘Cyrillic Release,” selling legitimate CD’s for about $7 (200 roubles) compared with the $12 price for imported CD’s.

Considering CD’s cost less than $0.50 each to manufacturer, with inserted packaging, many consumers are as happy with pirate music CD’s at around $3 each in underpasses and kiosks across the city.

“The public are not emotionally responsive,” Ugrinovich laments.

While the industry funded NFPP and Council for International Property Rights (CIPR) are vociferous in their denouncement of fake clothing, pirated music and films and computer software, surveys show public indifference.

“Low household incomes, high social differentiation and high prices of genuine goods” are cited by the public in one survey sponsored by CIPR as the reasons why counterfeit products are acceptable.

The biggest areas of counterfeiting are in clothing and footwear, with 57% of footwear tested by the Ministry of Economic Trade and Development manufactured by unidentified producers. 56% of tested textile garments and 32% of leather products were similarly found to have no provenance for the names on the labels.

Together with fake medicines, which most consumers say are “completely unacceptable”, consumers are also upset , but fully aware of, the problem of fake bottled water, vodka and wine.

However a survey conducted by ROMIR Monitoring Research Holding found that 11% of beauty aids and fragrances sold on the Russian market are counterfeit, as are 23% of cigarettes and even 6% of milk products.

Arbat Prestige, the high street retailer, filed a libel suit against local television channel Moskovia in August, after the station ran reports alleging that the chain sells products that are contraband, fake or past their use-by dates.

Earlier this year, Arbat Prestige pulled all products with the Polish Pulanna brand name from its shelves, ending a legal dispute where the Polish manufacturer claimed the Moscowbased chain was selling Pulanna branded goods illegally manufactured in China.

While expats form a very minor market in Russia for counterfeit goods, they too are happy to make the most of the situation.

“If you want to watch a DVD English language film in English, you have to buy a pirate,” says one senior executive here. “Because of the regional coding on DVD players and software, I cannot even watch a legal version bought in London. The only people supplying original soundtrack DVD’s that will play on Russian area players are the pirates.”

Many high-ticket computer software companies have virtually priced themselves out of the Russian market.

“If you search hard enough and ask enough stalls in the software markets you can find virtually any software from the international market place,” one computer buff told Passport. “Even if an original version costs over a thousand dollars, you can get a pirate copy here for a few hundred roubles.”

Russian pirates are certainly innovative. Recently they have started writing pirated music in the popular MP3 format to DVD’s which have a much higher capacity than the 700 megabyte on CD’s. NFPP’s Ugrinovich says they are getting 500 tracks on a DVD. “With 10 DVD’s you will have all the world’s music catalogue in your library.”

While Russia is getting lambasted in the US and Europe for being a centre of piracy, officials say the west is not helping. The head of the interior ministry’s economic security department, Sergei Meshcheryakov, told a news conference in September that all the equipment used by pirates to mass-produce CDs and DVDs comes from abroad, under false documentation.

Meshcheryakov wants advance warning from Western authorities when such equipment is being shipped to Russia. “If we had some pre-emptive information, we would already be waiting for the equipment at customs,” he said.

Meshcheryakov said there were now 42 factories that might be involved in producing counterfeit disks and “the number is constantly growing and may increase by 10 by the end of the year.”

Low purchasing power and mild punishments for offenders, all contribute to driving up demand, Mesheryakov said.

Local producers of copyright works seem to be in a better position to protect themselves than foreigners. For example, the copies of Prompt, the Russian translation software programme, being sold by vendors dealing in pirated software are almost always the 30-free trial version which is available by download from the Internet as well.

Following a huge anti-piracy campaign by Channel 1, the record breaking movies Turkish Gambit and Night Watch, which were co-produced by the channel, had a virtually pirate free launch. Not so fortunate was a recent Nikita Mikhailkov spectacular, which was available on pirate DVD’s across Moscow on the same day as its premiere.

One niche market for fakes that appears to be flourishing with no interest by the original manufacturers, the Interior Ministry or Ministry of Economy and Trade in clamping down is fake designer watches.

Stroll along Tverskaya street on any afternoon and you are bound to be accosted by at least one man proffering a fake watch.

“For 200 to 300 rubles in any open market of Russia; in pedestrian underpasses and on the metro you will find all known world marks of watches,” says Juliette Svyatoshova of local watch manufacturer Komolov. “However, in a few days the glass or hands will fall off, and soon they will stop, if they ever worked at all,” she says. “But externally - they are very similar to the original”.

She told Passport, that in Russia for most people, “A watch is a watch. Here, we have got so used to fakes that the very existence of originals is strongly in doubt. The mentality of the Russian consumer developed on the absolute inaccessibility of expensive Swiss brands, and an abundance of the fakes, often of quite good quality”. High quality fakes, she asserted, are usually sold either in expensive jewellery shops, because the quality and cost of the materials involved are high or are imported “to order” for customers. “Genuine watches in Russia are worn only by very rich people buying them abroad, usually for fidelity in the Switzerland, or by the noveaux riche snobs,” she asserted.

Often, there is very no attempt to disguise what is being sold as a fake.

On an approach to an outer suburban metro station, a ‘babushka’ was proffering a clutch of watches. When I stopped to look more closely at the Adidas logo on the sporty strap and the Adidas name on the face, she said “They are Taiwanese, cheap!”

Meanwhile, Russian pirating of American-made movies, music and software is moving to the top of the agenda in negotiations over a bilateral trade agreement, which Russia needs as a preliminary to joining the World Trade Organisation. With both governments seeking to conclude such an agreement before the year-end, U.S. Trade Representative Rob Portman and Economic Development and Trade Minister German Gref are head to head in discussions that may finally see the closure of the pirate disc factories and an end to cheap music and videos on the local market.

Luxury Watchmaker Sails Close to the Wind

A few of the fake watches that can be bought on Tverskaya - average prices U$20 - US$130

Alexander Komolov, the founder of Komolov International Corporation, got his start in the watch-making industry by virtue of the Russian ruble default and 1998 economic crisis. Komolov, a physicist, worked in a research and production complex manufacturing artificial sapphire plates for manufacturing microcircuits for the nuclear industry, military technical equipment and other specialised applications. The plate manufacturer had a large volume of by-product which could be used for simpler industries, such as sapphire watch faces. During the period of high inflation Russia suffered during the Yeltsin era, watch factories like other enterprises, resorted to barter, swapping watch cases and complete finished watches for the sapphire glass for faces.

Many Russian watch factories went bankrupt releasing scores of highly skilled craftsmen on the labour market.

Komolov gathered a strong professional team and with the latest Swiss equipment entered the top end of the Russian watch market. While Komolov’s production is modelled on some of the best known exclusive marques of the west, his production is of high quality and never carries the name Rolex or Breitling, so cannot be considered ‘fake’ in the true sense of the word, with its implications of ‘passing off’. However, he admits to sailing close to the wind with some of his production. One model for example is an identical copy of a Longines model, but without the name.

In fact Komolov takes pride that some of his watches surpass in quality the well-known originals on which they are based, but incorporating a face designed to the order of his elite client list bearing a trade mark and name of a customer. In fact, Komolov imports Swiss watch movements such as the automatic Rolex Daytona, several types of Swiss ETA movement and also uses the mechanical Russian movement from top of the line manufacturer Poljot. Using 18 k and 14 k gold cases he puts diamonds and blue sapphires on some of his models.

“All watches made by our company are collectibles,” says Juliette Svyatoshova. “they are made in very small sets, sometimes just a single copy and under strict order from our clients.”

One of Komolov’s clients is the Presidential Administration, which orders watches bearing the presidential seal and president Vladimir Putin’s signature, as gifts to important visitors, or to recognize people for outstanding service to the nation.

You cannot buy such watches, asserts Svyatoshova. However, she offers a price list with five types of watch ranging in price from $700 to $7,800. Their most expensive model is a Special Edition Admiral, with mechanical Poljot movement, in white palladium and gold, embellished with 258 diamonds on the case and eight diamonds and seven blue sapphires on the dial. The price tag? $15,590.

But Komolov is also suffering from fakes. The Chinese are producing fake Russian presidential watches and selling them in the local market.