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. Last Updated: 07/27/2016

For Pirates, Russia Remains a Treasure Island

ReutersA bulldozer burying bootleg CDs in Moscow. As much as 64 percent of CDs and 90 percent of DVDs sold in Russia are illegal.
When Interior Minister Rashid Nurgaliyev summoned his chief pirate hunter for a briefing on the war against bootlegging earlier this month, Andrei Starostin was well prepared.

Gorbushka, he was pleased to report, was now 100 percent legitimate.

A raid of Moscow's sprawling Mecca of counterfeit capitalism that very morning made sure of it. Within hours, however, it was back to business as usual for Gorbushka's hawkers.

"During the raid, vendors were asking, 'When are the cops going to leave? It's time to work.' An hour later the market was full of pirated stuff again," one source close to law enforcement said.

So goes the fight against intellectual property crimes in a country where more than half of the software used by the government itself is illegal, according to a recent survey by the Transportation and Communications Ministry.

From knockoff name brands to bootlegs of Hollywood blockbusters, counterfeiting and piracy activities continue to pump billions of dollars into the shadow economy each year. But the issue, experts say, is not simply about civilizing the marketplace. If the government fails to make fighting violations of intellectual property rights a priority, they say, Russia will squander its intellectual prowess and become little more than a natural resources appendage to the industrialized world.

"The next war will not be for oil but for intellectual property," said Alexander Leonov, head of the Ip-Pro law firm.

While lawyers like Leonov agree that Russia's IP legislation generally meets international standards, enforcement still lags far behind. Never simple, the task is complicated by the simple fact that much of the population -- including law enforcement agents themselves -- do not view buying or producing pirated goods as a serious crime.

But the numbers say otherwise. Record companies and film studios -- both foreign and domestic -- say they lost out on some $800 million in revenues in Russia last year alone. Fed by dozens of optical disc lines, often run from the bowels of closed defense and atomic energy plants, pirates claim 64 percent of the music market and as much as 90 percent of the DVD market, according to industry research.

Yet despite the pervasiveness of counterfeits, most people remain ambivalent about using fakes.

While three out of four Russians have purchased a counterfeit product within the last two years, the same number disapprove of the practice and link manufacturers to organized crime and even terrorism, according to a recent survey conducted by the Interactive Research Group and the Coalition for Intellectual Property Rights, or CIPR.

The reason for this, industry watchers say, is that counterfeiters target educated city dwellers whose appetites for consumer goods are much more developed than their incomes. Pirates further exploit market disparities by luring professionals from science and industry into the shadow economy with comparatively high wages, they say.

One Step at a Time

Nevertheless, lawyers point out that Russia has come a long way in the last decade -- from having no IP legislation to being just shy of complying with World Trade Organization standards.

Tougher legislation has meant a flood of lawsuits, as trademark and patent owners increasingly take their cases to court. "The pendulum has swung," said Yevgeny Ariyevich, a partner at Baker & McKenzie. But if those laws cannot be enforced at the factory gates and in the marketplace, progress will continue to be imperceptible, he added.

"There are no major results yet. We're only at the beginning," said Konstantin Zemchenkov, director of the Russian Anti-Piracy Organization, a pressure group established by Hollywood studios to track down pirates secreted away in nondescript factories.

Zemchenkov estimates that just 15 percent of police raids on these plants end up in court, and that those that do rarely end with penalties that will discourage the practice. A recent raid on a plant in Rostov-on-Don, for example, yielded a paltry fine of $4,000, he said.

Gennady Tsarapkin, head of the Interior Ministry's consumer markets division, said that this is because investigators in the regions are hampered by a lack of contact with the legal owners of the brands being faked.

And even if counterfeiters are caught, they often avoid prosecution by way of a loophole in the Criminal Code found in Article 180, which states that they can be liable only for causing "major damages" to trademark owners, but "major damages" is not defined. In addition, all samples of suspected counterfeit goods seized must be sent to Moscow for examination, delaying investigations. Destroying counterfeits so they cannot be sold provides yet another headache.

Tsarapkin said that police inspected 100,000 enterprises nationwide last year in a hunt for pirated goods, and as a result concluded that counterfeiting dropped 15 percent. But most independent observers, indeed even President Vladimir Putin, say that official crime figures are at best misleading and at worst simply fabricated.

"There are still many questions on the quality and credibility of [Interior Ministry] statistics," Putin told law enforcement officers last week.

Indeed, one source close to the ministry's IP department said that the piracy figures included minor routine checks and that the fall in counterfeit levels was exaggerated. "Companies are still losing money from piracy at the same rate as two years ago," the source said.

Filling the Holes

Draft legislation plugging gaps in the Criminal Code and Criminal Procedural Code is expected to be adopted in a first reading during the State Duma's spring session, said Alexander Shelemekh, vice president of CIPR.

Among other things, the changes would outlaw the reproduction of foreign recordings from before 1995 and grant exclusive rights to copyright holders to put their work on the Internet.

However, IP legislation has had a rocky ride in parliament in the past --key amendments to the law on copyrights and other related issues have been shelved for more than two years.

Slowed by Change

Also hampering efforts to combat IP violations is Putin's recent overhaul of the government, which shrank the number of ministries and redefined their duties.

The state trademark and patent body Rospatent is now the Federal Service for Intellectual Property, Patents and Trademarks and is subordinated to the new Education and Science Ministry.

On Thursday, a draft statute defining the new service is expected to be unveiled, according to CIPR. Boris Simonov, a little-known official in the former Industry, Science and Technology Ministry, has been named to replace Alexander Korchagin as the government's new director of IP policy, and his views on the issue are not well-known.

The administrative revamp has also suspended the work of the government committee created at the end of 2002 to wage war on IP abusers. Headed by then-Prime Minister Mikhail Kasyanov, the committee was responsible for one of the most visible clampdowns on street sales of pirated discs ever.

The government resolution banning CD, DVD and video sales from stalls in August "hit pirates hard," said Alexander Tikhonov of Intermedia, a leading music industry watcher. As a result, illegal sales were trimmed by 4 percent, he said. But, he added, pirates are now setting up larger premises with a smattering of licensed goods and providing to-your-door delivery over the Internet.

The fate of the IP committee is expected to be a litmus test of the new government's commitment to reform.

A Geostrategic Priority

Some observers say that efforts against IP violators must not simply be redoubled, but taken to an entirely new level.

The IP issue needs to be given the status of a "geostrategic priority," said Vyacheslav Kichatov, an expert with the Intellectual Property Information and Legal Center, a joint project between the United Nations Development Program and the former Rospatent.

"The real reasons [for IP violations] have to do with the state of the economy, the state of the social environment and the political situation," said Kichatov, one of the authors of a recent report on the state of IP in Russia.

IP abuses and their links to organized crime should reap the same awareness as international terrorism, the report argues. Tougher sentences and pressure on law enforcement agencies only treat the symptoms of the problem.

While the country's IP legislation generally lives up to international norms, the report finds, Russia can only compete with more developed nations if the huge criminal incomes generated by piracy are curtailed and channeled into scientific and technical programs.

"Russia's potential niche in the sphere of advanced technologies is constantly shrinking," the report says.

Pirate chaser Zemchenkov, who has survived attempts on his life, knows the ruthlessness of counterfeiters firsthand.

Much more needs to be done to smash these organizations with their international tentacles, he said.

"We have a counterfeit campaign for a month, then they switch to something else. Pressure needs to be applied every day."