Smugglers Lend iPhone Sales a Hand

BloombergVendors are selling iPhones online for more than twice their U.S. price.
Apple has gained unlikely allies in its bid to boost iPhone sales: Russian smugglers.

The device isn't sold in Russia by California-based Apple, and it cannot be used legally on local networks. Still, about 250,000 people own them, more than in any other country except the United States and China, said Eldar Murtazin, chief analyst at Moscow-based Mobile Research Group.

That popularity has turned into a bonanza for traders who sell the phones in kiosks and over the Internet for $1,000 each, more than twice the U.S. price. Hackers say they charge as much as 2,500 rubles ($105) to "unlock" them so they work locally.

"It's an icon for Russians," said Timofei Kulikov, a lawyer and buyer of electronic products for X5 Retail Group, the country's largest supermarket chain. "If you see two businessmen at lunch in Moscow, they'll both have iPhones on the table."

The evolution from web-surfing touch-screen gadget to status symbol has been a boon for Peter Aloisson. The jeweler sold a diamond-studded iPhone encased in white gold to a Russian businessman in March for 120,000 euros ($188,000) and is working on a 500,000 euro version that may go to another Russian client.

"There is no doubt that Russia, when it comes to luxury items, is by far the best marketplace," Aloisson, 47, said from his studio in Vienna.

"More and more Russian customers visit us here in Austria," said Aloisson, who started customizing handsets 10 years ago.

Notable users include President-elect Dmitry Medvedev, billionaire Alexander Mamut and Boris Yeltsin, grandson of the former president, Kommersant reported. Medvedev's spokeswoman declined to comment.

Murtazin says about 20,000 iPhones arrive in Russia each month.

"They arrive in suitcases," Murtazin said. "Practically every flight from the U.S. brings new iPhones."

Apple, the world's biggest buyer of flash memory chips, has not said how many of the 4 million iPhones sold through Jan. 15 were unlocked to work on unauthorized networks. Analysts, including Gene Munster of Piper Jaffray, put the figure at 1 million. About 400,000 of those are in China, CNET News reported in February, citing market research firm In-Stat.

Apple, which sells its 8-gigabyte version for $399, gets an undisclosed cut of monthly wireless fees for the device, released in June, and has deals with carriers in the United States, Britain, Germany, France, Ireland and Austria. Users have hacked the handset to modify its software so it works on other carriers' networks, depriving Apple of fees.

The iPhone's popularity in Russia, home to 101 billionaires by Finans magazine's count, is an irritation for retailers, including Yevroset, the country's largest mobile-phone chain, whose sales are suffering because it cannot stock the product.

"The phones aren't certified on the territory of the Russian Federation," Yevroset co-owner and chairman Yevgeny Chichvarkin, 33, said in a telephone interview. "Import duties and value-added taxes aren't paid."

The prevalence of the iPhone underscores the country's attitude toward licensed goods, which the United States has made a sticking point in approving the country's 14-year quest to join the World Trade Organization. Hackers and sellers of pirated products openly advertise on the Internet.

"You can basically do whatever you like," said Ivan, 21, after he unlocked an iPhone in a basement office he shares with two friends in one of the capital's most expensive neighborhoods. "We're not liable for anything because officially it's not here," said Ivan, who declined to give his last name.