Friday, August 19, 2022

Russia bypassing sanctions


How Russia is dodging Western sanctions with gray-market imports

A deeper dive into the gray market has meant that Russians continue to have access to such goods as iPhones and Zara dresses even months after their Western makers left Russia. But are these parallel imports even legal?

A re:Store shop in Moscow

Apple reseller in Russia re:Store continues to be well stocked with latest iPhone models thanks to parallel imports 

Russia has been importing goods without the consent of their Western manufacturers for months. It's part of a scheme aimed at helping the country bypass supply restrictions put in place by Western countries and companies in response to the invasion of Ukraine.

Parallel imports, or gray-market purchases, into Russia totaled $6 billion (€5.9 billion) from May to July, Denis Manturov, Russia's deputy prime minister and minister of industry and trade, told reporters this week.

Russia launched the parallel imports scheme, covering goods ranging from auto parts to gaming consoles, in May as imports slumped due to Western sanctions and scores of foreign companies left its shores in protest against the war in Ukraine and to avoid any potential reputational damage.

"Russia is not going to do nothing in response to Western sanctions. So, it obviously has procedures in place to try and get a lot of critical imports that it needs to sustain the economy and maintain the war," Timothy Ash, an emerging-market strategist from BlueBay Asset Management, told DW. "The question mark and challenge will be what the West will do to try and tighten the sanctions regime to stop that from happening." 

What are parallel imports?

Parallel imports refer to goods that are imported into a market without their manufacturers' consent. To be clear, they are authentic goods, but they may be meant by the manufacturer to be sold in a different country or region.

For example, if a pair of Levi's jeans produced, packaged and priced for the Indian market is imported by a reseller to be sold in Germany outside of the apparel maker's certified distribution channels, then that's a parallel import.

Such imports are deemed to be on the gray market as they are sold by unauthorized dealers. Since brand owners have no control over the distribution of these goods, they are not covered by their warranty plans.   

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What is Russia doing?

In May, Russia released a list of Western goods eligible to be imported under the parallel imports scheme. The list included critical imports like warships, spare parts needed for railways and auto components as well as consumer goods like electronics and household appliances, clothing, footwear and cosmetics — goods that Russia said their Western manufacturers "refused to supply directly."

Some of the brands on the list were Mercedes-Benz, Volkswagen, Continental, Ferrari, Apple, Samsung, Microsoft, Siemens, Duracell, Canon and PlayStation.

The Russian scheme offers importers protection from civil suits for bypassing official distribution channels.

Much of the unauthorized imports into Russia are coming via post-Soviet countries like Kazakhstan, Armenia and Belarus.

Are these gray-market purchases legal?

Parallel imports are typically not illegal. They are original, licensed products just obtained via parallel distribution channels, often more expensively.

"Gray and mysterious may only be the distribution channels by which these goods find their way to the importing country," according to a document published by the World Intellectual Property Organization.

"If products sold or imported by third parties fall within the scope of patents, trademarks or copyrights valid in this particular country, such sale or importation by third parties is generally deemed infringing," the document said.

The Russian scheme involves the international principle of copyright exhaustion, which allows a Russian company to import a product without the consent of the manufacturer as soon as it starts selling in any country in the world, according to Russia's Interfax news agency.

This means when Apple, which is on the Russian parallel imports list, starts selling the iPhone 14 later this year, Russian resellers like re:store would be able to import them for sale despite the US tech giant pulling out of the country months ago.     

How do parallel imports support the Russian economy?

The Russian scheme is aimed at ensuring the availability of vital imports, which plunged following the exodus of Western companies.

Moscow expects parallel imports to touch $16 billion this year, a figure that would be equivalent to only 4% of overall imports in 2021. By comparison, total imports into Russia are expected to collapse by as much as a third this year.

"The biggest problem for Putin is going to be rebuilding the Russian military, which has been massively destroyed in terms of equipment in Ukraine. If the car production in Russia has stopped because they can't get electronics components, then imagine trying to rebuild a tank or build a tank or an airplane," Ash said.

Experts say the Kremlin expects the parallel imports scheme to serve yet another purpose. The various consumer and luxury goods on the list are meant to ensure Russians continue to go about their daily lives without much disruption in the face of Western sanctions. 

"Maybe, it's more a PR exercise aimed at the domestic audience trying to send the message that sanctions aren't working and that we're winning," Ash said.

What can the West do to curb parallel imports into Russia?

Since Russia is applying the international copyright exhaustion rule, Western companies may not be able to do a lot to prevent the parallel import of their goods.

Ash says Western governments could exhort countries and companies to not help Russia evade sanctions or even threaten them with secondary sanctions.

"The more Russia tells us about this, the more they are public about it, the more likely the West is to tighten sanctions to stop it from happening," Ash said.

Edited by: Hardy Graupner

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