How gray-market imports to Russia work Back to the post-USSR
The Insider has published an article about the parallel import mechanism of the Russian market in the consumer electronics, clothing and cosmetics markets. Caliber.Az reprints the article.
In response to the mass exodus of foreign brands from the Russian market, the authorities legalized the import of goods into the country bypassing the right holders. With the help of parallel imports, they expect to “provide the domestic market with goods in demand and stabilize their prices.” In fact, the scheme will cause a flood of counterfeit goods in stores, a collapse of traditional retail and a return to the 90s, experts warn. The Insider spoke with analysts and businessmen to find out how the parallel import mechanism already works (or rather doesn't work) in the consumer electronics, clothing and cosmetics markets.
In August entrepreneur Alexander Gorbunov opened a Panika store in Krasnoyarsk selling Zara clothing brought into the country through parallel imports. The Spanish Inditex conglomerate, the owner of the brand, had suspended its Russian operations at the very beginning of March. Gorbunov told the local media that he had simply decided to please his girlfriend, “She once said she wanted Zara to come back. I said, “Let me bring Zara back for you.”“ To begin with, he ordered a small batch worth about 2 million rubles through an acquaintance in Kazakhstan, but he expects the next deliveries to come from Turkey: it turned out that buying there will be more profitable. Ideally, Gorbunov would like to turn the new outlet into a multi-brand store, where other brands that had left Russia will also be represented. But if there is no active demand in the store, the businessman will close it in a year.
The Government allowed the importation of foreign products into Russia without the consent of the right holders at the end of March, and on May 6 the Ministry of Industry and Trade approved the list of products that can be delivered bypassing customs control. Today it includes more than 50 categories - both industrial equipment and materials, consumer goods, including cars, gadgets, clothing and shoes, toys, cosmetics and more (drugs and food are not included in the list). In recent months, almost $6.5 billion worth of products have been imported into Russia according to the scheme, the head of the Ministry of Industry and Trade Manturov has recently reported.
From a legal standpoint, legalization of parallel imports is related to the principle of expiration of the exclusive right to the trademark: the right holder forfeits the ability to control the distribution of his product after the initial sale, says an intellectual property lawyer:
“Now resellers can buy original branded goods in third countries and sell them in Russia without the consent of the manufacturer, and this will be legal. Previously, such actions led to liability before the right holder”.
Dmitry, a businessman from Guangzhou, who is engaged in parallel deliveries to Russia, noted in a conversation with The Insider that those who want to buy goods in China, now have to open shell companies in Kazakhstan and Kyrgyzstan. Goods are registered in these companies, and payments are made through them:
“For example, we approach Lenovo in China to buy a batch of their goods. They ask what we are going to do with the product. “We're going to export the goods to Kyrgyzstan ourselves, because you don't have a presence in that country.” - “Okay, no problem.” Then I wire the money to my Chinese company, Lenovo ships the goods to me, and I go on to Kyrgyzstan. Customs clearance and all the logistics in Kyrgyzstan will be handled by the Russian client's company. The customer in Russia transfers the payment to the Kyrgyz company, which pays me, and I pay Lenovo in China.”
According to Dmitry, a few years ago it took an average of 30-45 days for goods sent from Guangzhou to reach Moscow, but now the delivery time has decreased several times.
“Two weeks ago, we sent 15-20 cubic meters of equipment via Kazakhstan, and yesterday it was already in Moscow. It feels like after the logistics collapse that happened during the pandemic, customs officials just opened the gates, and trucks have been coming and going in huge numbers every day. It's as if the border between China and Kazakhstan no longer exists - you can bring in whatever you want.”
The Insider’s sources have learned that immediately after the legalization of parallel imports through Kazakhstan Siemens equipment supplies were organized. Large volumes of networking equipment are imported through unofficial channels for Russian government and close-to-government companies.
In addition to the countries of the Eurasian Economic Union (Kazakhstan, Kyrgyzstan, Armenia, Belarus), intermediaries may also be located in other regions where there are no restrictions, for example, in Turkey. Thus, some Russian sellers are already cooperating with large Turkish wholesalers, whose function is to “buy goods for themselves” in Europe. The question is how carefully Western producers will control the sale of their products in foreign markets, says The Insider’s another source, a prominent former businessman turned business consultant:
“I don't think the Asian manufacturers will be watching for it much, they don't care. Italian, French, and German manufacturers are also likely to turn a blind eye to such things. But American manufacturers will be watching closely. Apple, for example, is able to control the supply of their technology literally down to the unit. It is possible that some twelfth package of sanctions will require it to block its devices in Russia.”
Too little, too bad, no warranty
It is impossible to completely replace direct imports with parallel ones: the Russian market is too large. The exports of the world's major companies are subject to quotas - each country can only get so many goods. “Russian business will not be able to draw these goods from neighboring countries, because their markets are much smaller than ours, and the product range is narrower,” says one of the experts interviewed.
“For example, you can’t get more Apple products. I assume that Apple's sales in re:Store or M.Video are higher than the aggregate Apple product sales in many countries of the world. The situation with Zara is similar. By the number of Zara branded stores, Russia was among the top five countries. Zara’s business model assumes that the range of products in its stores should be renewed every two weeks. Parallel importers are obviously unable to provide the same volume of purchases and the same range of products.”
However, there is no guarantee that the logistics channel which worked once can be used repeatedly - the route will most likely have to be laid out anew for the next batch of goods. A Russian retailer may accidentally find a free stock of goods, even in Europe, and organize its delivery through intermediaries, but it will be a one-time occasion. According to businessmen, it is impossible to establish a reliable and uninterrupted supply in conditions of complete uncertainty.
There are other risks as well. In contrast to the authorized distributors, new partners are unlikely to faithfully comply with the requirements for transportation and storage of goods; in the end, the damage from broken goods can nullify a large part of the profits. And most importantly, by associating with “gray” suppliers, Russian companies may lose the trust of brand owners forever. “If Inventive Retail Group
The end consumer will also face problems when buying “grey” imports. Because of the lengthening of logistics chains, the prices will increase. Under the guise of parallel supplies counterfeit goods will flood the stores, and the manufacturer’s warranty will not apply.
Used iPhones vs Xiaomi with a warranty
Besides re:Store, other consumer electronics retailers such as M.Video-Eldorado, Svyaznoy, DNS, and the Ozon and Wildberries marketplaces have also tried the new supply schemes. “They're bringing in a little bit, but it's a temporary solution. I don't believe that even 10% of the volume sold in the Russian Federation can be brought in this way,” says Leonid (name changed), an employee of a large electronics company. In an interview with The Insider, he that he was aware of purchases of Apple products through Hong Kong and shipments of Samsung smartphones destined for the Kazakhstan market:
“At the same time, some Samsungs have had problems with activation. If a Russian SIM card is inserted immediately, they are blocked. You have to take the product to an official service center, pay 5,000 rubles and wait about a month.”
Danil Garashchenko, editor-in-chief of Rozetked, adds that the MacBook Pro and MacBook Air computers with the M2 chip that he bought recently were imported from the UAE. According to his observations, in recent months the prices have nearly stabilized, yet some items have become more expensive: for example, the price range of the MacBook Air 16/512 GB is very wide - from 160,000 to 223,000 rubles.
According to Kommersant, shipments of electronics from the EEU countries are possible on account of surplus stocks, and market players are concerned that with the seasonal growth of demand before the new school year local sellers will refuse to supply Russian companies. Intermediaries from third countries are raising prices for Russian partners and, as a result, “it makes no sense to bring in certain brands or products since their prices in Russia become effectively exorbitant.”
Due to the extreme scarcity of parallel imports, Russian retailers are running out of stocks of Apple and Samsung smartphones. It is known that since the beginning of the year the supply of American and Korean brands has decreased by almost 90%, and their combined share in sales may shrink to 10% by the end of the year. That said, sales of smartphones from Chinese manufacturers are rapidly growing. Thus, Realme has exceeded Apple and Samsung combined in sales (in units), coming in second place in July with a market share of 17%, according to MTS. In fourth place (after Samsung) are less known Chinese brands such as Transsion, the owner of the Tecno brand, which used to sell its product through “second-tier” retailers or online. And most devices were sold by Xiaomi last month, whose market share, together with the Poco sub-brand, increased to 42%.
“I specifically inquired: the channel through which Xiaomi ships its products to Russia is the same one it used before: the products are shipped from Hong Kong,” says an independent IT and telecom market expert who wished to remain anonymous.
“And the phones are provided with a warranty from Xiaomi. Now imagine: you come to an MTS salon, for example, and there on the shelf is a Samsung for, say, 30,000-40,000 rubles, and next to it is a Xiaomi costing 20,000 rubles. It is completely unclear what happens to the Samsung warranty, you may buy it at your own risk, but Xiaomi has an official warranty. A normal person's choice is to buy a Xiaomi.”
According to the analyst, even if parallel imports don’t pay off, Russian consumers will not be left without phones: if earlier they used to buy Apple, Samsung and Xiaomi, now they will be buying Xiaomi, Realme and Tecno. And the mass consumer is likely to buy the iPhone on Avito as a secondhand item.
Some companies are trying to expand their range not only with Chinese products. For example, the M.Video-Eldorado chain offers its customers the so-called “refurbishi” - refurbished or used iPhones, which have been repaired and brought to marketable condition before resale. According to Leonid who works for a company which sells electronics, it used to be a marginal business.
“This is what small entrepreneurs were doing, trading, for example, on Yandex.Market. Now it's a kind of nonsense that respectable guys do. I'm not sure they can make any money out of it.”
Grey imports of electronics never stopped. Back in 2008 when they started bringing in the first iPhones from America many people in Russia were making made money on jailbreaking and unlocking them, The Insider’s interviewees say. They believe a similar burst of entrepreneurial activity may be possible in the new situation: “Small businessmen will be inventing new ways of doing business as best they can.”
Dmitry from Guangzhou relates how he once sent shipments of iPhones to Moscow through Aeroflot flight attendants who flew to Hong Kong: they carried two or three suitcases of contraband with them and handed them over to the “receiving party” at Sheremetyevo airport. Transportation rates ranged from $15 to $50 per phone.
“I was acquainted with the stewardesses and know my way around the hotels. They just passed my phone number to one another and called me asking, “Do you have cargo?”
Clothing: leftover sales, knockoffs and reputation concerns
After the start of the war in Ukraine, dozens of foreign clothing and footwear brands announced the suspension or cessation of operations in Russia. Among them are Spanish concern Inditex (Zara, Massimo Dutti, Pull & Bear, Bershka, Stradivarius, Oysho), Swedish Hennes & Mauritz (H&M, COS, Monki, & Other Stories, Arket) and French LVMH (Christian Dior, Fendi, Louis Vuitton), as well as Mango, Nike, Chanel, Burberry, Jacquemus and others. Supplies of luxury brands to Russia are also hampered by the officially imposed western sanctions. The U.S. Department of Commerce imposed a ban on exports of luxury goods to Russia (including clothing and shoes) worth more than $ 1,000 per item; in the European Union these restrictions apply to products with a purchase price above 300 euros per item.
“There are no formal barriers for cheaper goods to be purchased and imported directly into the Russian Federation. There are no legitimate restrictive barriers against bulk sales to Russian buyers. But other problems may arise with payment processing or logistics,” explains Anna Lebsak-Kleimans, general director of Fashion Consulting Group.
The retailers that The Insider talked to are still hesitant to supply goods through unofficial channels, counting on the resumption of cooperation with foreign partners. Some are refocusing on local and Asian manufacturers.
“It is important for us to maintain good relationships with brands and their representatives, which have been built over many years. Therefore, we have made an emphasis on niche independent brands, we are working with new brands from Korea and China,” the KM20 concept store representatives say.
Rodion Mamontov, the founder of Leform, confirms that for serious market players, circumventing restrictions without the consent of partners may hinder “environmentally friendly interaction” in the future: “It’s a big risk. But we are lucky, we work directly, without the need to do it.”
Lamoda representatives responded by saying were monitoring the situation. They also stressed that their market strategy had always consisted in working directly with brands or with official distributors.
Reputational risks are not the only thing that keeps major players from using the new scheme. Purchases from the “free stock” are possible only in small quantities, which cannot fully cover the existing shortage. The fact is that all deliveries of branded goods to large retailers or representative offices are pre-ordered; no goods will be produced in the absence of official orders, says Olga Shteinberg, owner of the Fashion Pump Up Telegram channel and podcast.
“Even monobrands have buyers who make purchases based on the peculiarities of demand in the region in which they operate. Not all companies have so-called free stock, it is simply unprofitable to produce goods in advance. The brands Inditex, H&M, Uniqlo produce collections exclusively for their own retail space. If there is no space, they won't make clothes.”
As fashion brands were closing their company stores in Russia one after another, goods of some of them appeared on Russian marketplaces. They were either leftovers of the previously imported batches, or small deliveries under semi-official, behind-the-scenes agreements, Olga Shteinberg says. It is known that some brands are, in fact, planning to sell their leftovers at Lamoda and are considering options for further cooperation. For example, you can still find Massimo Dutti or well-known sports brands there. Wildberries has a much worse reputation, with lots of knockoffs being sold under well-known labels, the expert goes on to say:
“Take, for example, Converse sneakers (officially exited the Russian market in July). It is clear from the price that they are not original. It's impossible to buy an original pair of shoes of that brand for 2,300 rubles even on sale, they cost 14,000-15,000 rubles. Yet they are on Wildberries, in great numbers. Original Converse sneakers can still be found in the multibrand stores which have always sold them. By selling knockoffs they would kill their reputation among their customers, and they are unlikely to go for it.”
A suspiciously low price may really be an indication that the product is not original, or has been produced “behind the back” of the right holder, confirms Anna Lebsak-Kleimans. Thus, there were precedents in the luxury segment when unscrupulous manufacturers/contractors produced additional unaccounted batches. Such a product, in terms of its specs, may be fully identical to the original, but according to international copyright law, it is also counterfeit. According to the general director of Fashion Consulting Group, the prices on original products imported into the country as part of parallel imports may increase by at least 15%.
Some stores belonging to exiting brands have been simply changing their signboards. For example, one of Levi's stores in Moscow resumed work in July under a new brand JNS. According to RBC, the American manufacturer’s lease rights and stock of goods were bought by Lestate, a Russian sportswear distributor. In the future the company plans to develop a multi-brand network under the JNS label, making deliveries “using their own forces”. According to experts, such goods are likely to be bought in Turkey and the UAE.
Cosmetics: counterfeit, expired shelf life and focus on Korean brands
The list of goods, which the authorities allowed to import bypassing the right holders, also included well-known brands of perfumes and cosmetics. According to Ekaterina Khmelevskaya, the author of Aromablog, all the online stores have long been flooded with “gray” supplies, especially small and niche brands, but large retail chains have not resorted to them so far. In the new realities, however, the situation may change, president of Rive Gauche Edgar Shabanov told RBC Life: “We are not active supporters of parallel imports, but in the conditions of unilateral termination of obligations under current contracts by foreign suppliers, organizing supplies based on the parallel imports scheme is almost the only opportunity to saturate the market with products that are in demand.”
In recent months cosmetics and perfumery prices in the Russian market have already gone up by an average of 15-20%, and changes in logistics and related risks will force retailers to raise prices even more, experts predict.
However, so far, according to their observations, market players are frozen in anticipation, selling out old stock. “As far as I know, retail chains, such as Golden Apple, covered their bases and made purchases in the spring – they brought all the basic stuff that could be imported on any terms. These stocks should be enough for some time,” says Bogdan Zyryanov, administrator of the Hearthesmell Telegram channel devoted to perfumes. Brand representative offices are also stocked, but they can't sell products and chains can't buy them, says another source of The Insider. Companies will have to find an intermediary and a way to get the money out.
Unofficial supplies create serious problems for cosmetic chains as well. Manufacturers’ policies may pose the first obstacle. According to Anna Dycheva-Smirnova, a board member of the Russian Perfume and Cosmetics Association, some of them have been closely monitoring their shipments and recording destination points: “There are cosmetics companies that, having left the Russian market, have recorded their purchases volumes in contracts with distributors or representative offices (for example, +10% compared with the last year), and they are unlikely to be able to sneak in the volumes they need to saturate the Russian market.”
According to Bogdan Zyryanov, just as in the case of clothing and electronics, there is a great risk that counterfeit products will be on display in Russian stores under the guise of parallel imports.
“Often the difference is visible to the naked eye, but there are also examples of masterful counterfeiting, when it is not easy even for an expert to tell a fake perfume bottle from the original one. This includes the glass, the printing and the fragrance itself: for the first three minutes quality fakes “feel” very much like the originals. It is quite obvious that the inspecting authorities will have trouble identifying such goods. It is also possible that unauthorized distributors will be bringing goods with an expired shelf life to Russia, which they have been unable to sell in the exporting countries”.
The range of products will be narrower: Russian retailers won't be able to get all products and novelties. Previously, official suppliers demanded that whole brands and collections be on sale, but now local sellers will be buying only the most popular products which are guaranteed to sell well, Ekaterina Khmelevskaya says.
According to experts, large players will be better off expanding their product range not through parallel imports but through the development of their own brands and cooperation with alternative brands ready to deliver their goods to Russia officially. The departing Western brands can be replaced not only by the “Koreans” which are popular with Russians but also by less obvious manufacturers. According to Anna Dycheva-Smirnova, retail chains are actively negotiating to attract brands from China, India, Turkey, Pakistan, and Iran.
Back to the 90's
A former major businessman who is now a business consultant told The Insider he believes that in the coming years the Russian market will return to the practices of the 1990s-2000s and the archaic business infrastructure that featured a strong distribution link:
“Russian business has stepped into a huge gray area, where everyone is advancing by feel, like in a fog. I don't think that business communities have gone through such trials in any other country as we are going through now.
When business was born, the key companies in the marketplace were the wholesalers who brought in the goods. As a rule, they combined several functions at once: transportation, finance, and distribution. Then, when business matured, foreign brand representative offices came to the country and the functions were divided: transport companies began to deal with transportation, brand representative offices began to deal with orders and deliveries, and retail sales kept growing by themselves. What did, for example, the Apple representative office in Russia do? They would choose what to order, bring it in, arrange for customs clearance, insure the goods, and analyze sales. Now there is none of that: companies have to do everything themselves, they have to reinstate this complex and expensive process, and the required expertise has disappeared over the 20 years.”
The flow of “gray imports” will be increasing gradually, first through small suppliers or outright smugglers, the expert goes on to say. But as a result, the market will again have a powerful distribution channel – the wholesale companies that can build the whole process from the beginning to the end. This will be accompanied by the collapse of traditional retail and the growth of sales through marketplaces, which allow anonymous sellers.
The fact that the legalization of parallel imports will throw Russia back into the 90s has been also mentioned by other people interviewed by The Insider. “You're a shuttle trader; you bring in goods, but now you don't have to go to the market with them; you have a marketplace platform. The rapid growth of such marketplaces will lead to an increase in the flow of counterfeit goods.
In theory, Ozon, Wildberries and Yandex.Market require sellers to confirm the authenticity of goods, but in practice, they are unable to fight against fakes. “They save money on everything, they are short of staff; the growth rate of the business is such that the management has been unable to keep up with it for a long time,” says a Russian marketplace expert on condition of anonymity. “Complaints about counterfeits are often handled either by extremely overworked, poorly educated employees or simply by a software bot. And they watch out for counterfeit goods in much the same manner”.
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