Ban on parallel imports may be lifted by 2018-2020

The Russian government has announced that the ban on parallel imports may be lifted by 2018-2020.

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

The FAS’ plan to remove restrictions on parallel imports 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 had combated parallel imports efficiently by treating the products imported into Russia without the rights holders’ consent as counterfeits, in accordance with Article 14.10 of the Russian Code of Administrative Offences (illegal use of trademarks). The customs or police authorities then initiated administrative cases, and the courts' practice was to order the seizure and destruction of the 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 the trademarks, as the cars were not counterfeits. The court stated that the rights owner could not seek protection on the basis of the Code of Administrative Offences, but had to file a civil claim for trademark infringement based on the provisions of the Russian Civil Code.

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 recent years there have been a number of trademark infringement cases that resulted in the prohibition of parallel imports and compensation for damages under the provisions of the Civil Code.

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

In recent years, the FAS has been pushing to legalise parallel import through the amendment of Article 1487 of the Civil Code. The FAS' deputy head Andrey Kashevarov revealed in the summer of 2013 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 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. Many European countries follow this principle, thus prohibiting parallel imports. Under the international principle, IP rights are exhausted once the product has been sold by the IP owner, or with its consent, anywhere in the world. Countries such as the United States, Great Britain and Canada follow this principle, thus permitting parallel imports.

The FAS also intends to amend Article 14.1 of the Federal Law on the Protection of Competition so that the refusal by the rights owner to permit other companies to import genuine goods into Russia would constitute an act of unfair competition.

Several opponents of parallel imports sent an official request to the first deputy prime minister Igor Shuvalov, asking him to reject the FAS’ 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 World Trade Organisation obligations, and has led to a significant reduction in counterfeits.

Russia’s Ministry of Economic Development and 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.

In addition, the Association of European Businesses recently presented results of a study that sought to analyse the financial risks and socio-economic consequences of the liberalisation of parallel imports 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 the liberalisation of parallel imports would affect the Russian economy negatively. Most respondents indicated that the liberalisation would reduce the profitability of their business or that of their importers, 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 included 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; in case of liberalisation, 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 liberalisation would not lead to a decline in retail prices, but only in wholesale prices, which would not greatly affect consumers. The quality of service may also drop because parallel importers would not be interested in developing a relationship between consumers and brands. Finally, the respondents suggested that independent importers could possibly revert to shady schemes and corrupt practices, such as tax avoidance and fraud.

While timeframes for the potential introduction of parallel imports vary, at a 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 added that “five or six years is a reasonable period during which a return on investments can be derived”.

The FAS may propose a partial legalisation of parallel imports, maintaining the ban for products manufactured both in Russia and abroad, in order not to violate agreements with companies that have their production plants in Russia. In contrast, the FAS has proposed legalising parallel imports in the entire Customs Union territory. The Eurasian Economic Commission plans to initiate a study about the potential impact on the Customs Union member countries.

Sitora Rakhmanova, PETOŠEVIĆ, Moscow