A Silver Lining for Lovers of the Silver Screen

MTA man passing by a model warship advertising "Admiral" on Pushkin Square on Wednesday. Konstantin Ernst, a big film industry player, co-produced the flick.
Editor's note: This is the first in a series of reports about the effect of the global financial crisis on Russia. This report looks at the film industry.

While the global economic downturn has businesspeople in many sectors wondering whether they will survive, many of the people in the country's film industry seem to believe that a little belt-tightening could actually help.

After suffering along with the rest of the economy in the 1990s, the Russian film industry has staged something of a comeback. If Andrei Tarkovsky, one of the Soviet Union's most acclaimed and enigmatic film directors, was right in saying that people go to the movies to fill gaps in their own experience, then Russians have had a good number of gaps to fill.

Last year, the number of tickets to movies sold topped 100 million for the first time, according to industry magazine Russian Film Business. The total of 106.6 million people paying at the box office was 10 times the figure of 11.2 million in 2000, when the country was still experiencing the aftermath of the 1998 financial crisis.

Box office revenues were $565 million, with $148 million of that generated by Russian films, compared to only $6 million in 1997.

And while foreign films still hold the lead, there were 85 Russian theatrical releases last year and another 200 projects in production, compared to just 42 releases a decade earlier.

Notwithstanding the industry's spectacular growth in recent years, there are still factors that have hindered growth.

Igor Tabakov / MT
The Cinema Park theater chain has not registered any drop in attendance.
"Distribution remains the biggest issue," said director Mikhail Kalatozishvili, whose film "Wild Field" was presented at the Kinotavr festival in Sochi in June and at the Russian Film Festival in London late last month. "We still have only about 1,500 modern screens, and although this number is increasing it will be a few years before there are enough theaters to show many of the films produced."

Despite tough economic times looming, some film industry insiders actually say the sector may be protected better than other areas of the economy.

"The Russian film industry may be relatively insulated compared to other sectors," said Nikita Trynkin, chief financial officer at First Media Fund, one of the country's only private investment funds focusing on the film industry. "There are not enough movie theaters, theater attendance is low compared to other countries, and as selection criteria tightens, less promising prospects may not get financed and the promising ones may benefit."

Trynkin said up to half of all projects currently under way are not commercially viable and are being funded for reasons other than artistic or economic potential — like vanity, access to state funds, personal favoritism and even money laundering.

"These projects will be the first to go, making the market more efficient and, hopefully, resulting in increased quality in Russian films," Trynkin said.

Ria-novosti / AP
Prime Minister Vladimir Putin posing with actors on the St. Petersburg set of Mikhalkov's "Burnt by the Sun 2" in May. Its $70 million budget is giving industry investment figures a significant boost.
Risk, a concern that has moved front and center as global financial troubles have set in, has always been a standard in the film industry, where there are no guarantees of any financial return and the end product is intangible until the film is complete and reaches the theaters.

This week, the Culture Ministry confirmed that Natalya Bondarchuk would stop production of her film "Gogol. Up Close," one in a series of three films about Russian classics, because she had run over budget and securing new money in the current economic situation was difficult.

Aram Movsesyan, head of production at Central Partnership, a film production and distribution company, said the minimum outlay for a private investor looking to get involved in a film project is about $500,000, or about one-third of the average budget for a Russian film.

With the risk involved in picking one title, it makes more sense to invest in a portfolio of projects, reducing the losses if one is a flop. This, in turn, raises the minimum entry price for an investor into the $5 million to $10 million range.

First Media Fund plans to spend $23 million in 2008 and 2009 on 12 film projects and says interest among investors remains strong, despite the imminent global downturn.

"There is no indication that our investors will stop investing in projects already selected," Trynkin said. "On the contrary, some are more keen to invest, as traditional investment areas like the stock market have become too volatile."

Igor Tolstunov, director of the Profit film production company, is less sanguine about the industry's prospects.

"I think that next year we will see fewer films produced, as some private investors will choose to hold on to their capital," Tolstunov said. "Banks have already stopped lending to production companies for working capital needs."

Ria-novosti / AP
Mikhalkov giving Putin a tour of the "Burnt by the Sun 2" set. He warned this month of a crisis-related slowdown.
Central Partnership, one of a handful of big private investors in the Russian film industry, is part of Prof-Media holding, which in turn is a part of Interros, an investment group controlled by Vladimir Potanin.

Interros' industrial and financial holdings have suffered drastically in the past several months, with stock prices of Norilsk Nickel and Rosbank down over 70 percent and Polyus Gold shares down more than 55 percent for the same period.

Falling share prices and resulting margin calls, increasing difficulties in getting loans and slowing growth may distract Interros from thinking about its film interests.

Central Partnership has spent more than $30 million on the releases of just three big-budget productions — "Wolfhound," "Revenge" and "Streetracers" — in 2006 and 2007, according to information posted on its web site, but with less box office success than it had hoped for, market insiders said.

"I wouldn't say people have started going to the movies less," said Mikhail Andreyev, head of business development at Cinema Park, a chain of movie theaters also owned by Interros. "Through the ages, people have always looked for bread and circuses. The number of tickets sold is determined more by the quality of films shown, time of the year and weather."

Cinema Park today has 84 screens at 11 theaters throughout the country and plans to be operating 200 screens by the end of next year.

"So far, we do not plan to cut back on investment in the construction of movie theaters," Andreyev said. "We have not received any signals from our shareholders that this might happen."

Investment in domestically produced features was in the $200 million range last year and could be as high as $300 million this year. Two giant projects — "Burnt by the Sun 2," produced and directed by Nikita Mikhalkov, with a budget of $70 million, and "Obitayemy Ostrov," directed by Fedor Bondarchuk and produced by Aleksandr Rodnyansky and Sergei Melkumov, with a $30 million budget — have bumped numbers in the industry up just by themselves.

Konstantin Ernst, director of Channel One television, is another big player. His film "S Legkim Parom-2" grossed a record $56 million in Russian and Ukrainian theaters last year. This year, he co-produced "Admiral," a film about White Army leader Alexander Kolchak, released by 20th Century Fox at the beginning of the month.

One major source of funding has been the government, which invested $80 million into feature films in 2007 and a further $85 million in 2008, said Igor Kallistov, deputy head of the cinematography department at the Culture Ministry. This makes the government one of the largest investors in the sector, providing 30 to 40 percent of all funding for Russian films.

"The Culture Ministry is working on a program to allocate up to 300 million rubles ($11.4 million) in subsidies to producers whose films attract over 1 million viewers in 2009 and 2010," Kallistov said. "These subsidies will be in the form of marketing and promotion reimbursements and may be as high as 10 percent of box office receipts."

In addition to this, the government has proposed that up to 2 billion rubles are allocated to 10 "national" film projects that are geared to achieve Russia's social and ideological goals. The themes and selection criteria for these projects will be determined later in the year by a separate commission, and the funds will be awarded on a project basis, Kallistov said.

If all of the proposals the government has made for the film industry are realized, state spending on domestic feature and documentary films will increase by $95 million in 2009 and 2010, vital support during times of a slowdown.

But falling oil prices, in particular, have raised questions as to whether the government will come through. Finance Minister Alexei Kudrin has said the government will be able to meet its spending commitments and still run a budget surplus as long as the price of Russia's Urals blend oil remains above $70 per barrel — the range in which it lies at present.

Although some market participants say there are signals of a slowing economy — with counterparties delaying payments, banks cutting financing and service providers pushing for cost increases — most producers continue to be optimistic.

"Film budgets are likely to fall, and production companies will evaluate each film project much more scrupulously," Tolstunov said. "But I do not expect that we are entering bad times for the industry."

The problems experienced by the industry in the 1990s suggest that things could get tough again, but that was also a case where an industry that had long been state-run had to switch to operate in a world for profit for the first time. The reaction this time could be more like the Great Depression in the United States in the 1930s, when film attendance surged as people spent what little money they had on escaping with horror films and Marx Brothers comedies.

"During the Great Depression, movies saved America — they created a dream image of America, and it started living by that dream," said director Nikita Mikhalkov to a group of film students last week. "During this crisis, production in many small companies may stop due to lack of financing, and they will seek to become part of larger studios."

Market participants say a slowdown in film production is inevitable, as big private investors focus on problems with their core businesses and banks cut production financing. But for those that can create quality content, the crisis may create more opportunities than dangers.