Interview about Russian E-Commerce (Part I of II)

interview on russian search tips blogI recently gave an interview to Anna Oshkalo, who writes a great blog called Russian Search Tips:

Russian E-commerce Hands On

E-Commerce Market Update, June 2013

We recently presented a high-level overview of the Russian e-commerce market, and include the slide deck below.

Followers of this blog should be quite familiar with the overall themes, but the presentation includes some recent headlines and statistics highlighting just how dynamic the growth has been in the Russian e-commerce market, and how it’s expected to develop going forward.

Especially impressive is the growth in the number of Russian active online buyers (slide 7). At 93.13%, it eclipses all of the other markets which were presented on that slide by globalwebindex, including emerging markets such as Turkey and Poland.

ASOS Opens in Russia

… but still has some work to do

ASOS Russia Home Page

ASOS Russia Home Page

Joining the ranks of leading international e-commerce companies like Amazon, Kayak, Airbnb and eBay either announcing plans or opening a localized Russian offering, UK-based ASOS has officially launched the Russian version of its site.

The ASOS Russia country site is the latest edition to the company’s country-specific sites, joining the United States, France, Germany, Italy, Spain and Australia. Importantly, this is their first localized site in an “emerging market” country. A dedicated China site is due to launch by the end of 2013.

So how does it compare to indigenous Russian companies, from a Russian customer’s point of view?

Well done

  • Product descriptions: Product descriptions in Russian are adequate and follow the style of the main site.
  • FAQs: There is extensive information in Russian about topics such as ordering, delivery and returns.
  • Site search: ASOS site search is well executed. Searching the site for “очки gucci” (gucci sunglasses) returns the expected product listing, as does the more challenging test of “очки гуччи”.
  • Delivery cost and options: While the company offers free delivery thoughout Russia, the standard service is through the lamentable Russian Post (and possibly EMS). However, customers can upgrade to SPSR, a private courier service.

Areas for improvement

  • Customer service: ASOS Russia does not list any telephone number, Russian or otherwise — the only method of contact is via an online form. Russian customers generally expect to be able to contact online retailers via telephone or chat.
  • Payment options: are limited to credit cards and PayPal whereas the majority of online fashion sales in Russia are made via cash-on-delivery. About 80% of fashion goods are sold in this manner.
  • Returns: Returned products must be sent to the company’s warehouse in the UK with the cost to be borne by the customer.
  • Blog: the link to the ASOS blog is in Russian, thus elevating expectations, but once you click through, all of the blog content is in English.
  • Social media: While ASOS established a Russian Facebook group on 18 April 2013, it doesn’t have a VK group (VK being the dominant social media property in Russia, albeit one with a less upscale demographic than Facebook). Their Russian Facebook group (AsosRu) uses some nifty re-direct coding so that Russian users see only the AsosRu group while at the same time this new group inherits the 2.3 million members of their main group (ASOSOfficial). This latter point belongs in the “Well done” section!
  • Content and display: Pricing in kopeks is a cute feature… virtually all Russian sites omit them, given that 1 ruble is about 3 US cents.

Conclusion

ASOS Russia falls far short of the service levels being offered by local fashion e-tailers like LaModa, Wildberries and Ozon. It doesn’t seem that ASOS is trying to compete with them, but rather make their site more friendly to existing Russian customers.

The “look and feel” and selection of merchandise on ASOS positions it as more upscale than LaModa or Ozon and their target customer base is more likely to be of a higher income level, which arguably reduces the need for a localized Russian site. In this sense, ASOS’ product selection is more comparable to upscale Russian fashion sites like TrendsBrands.ru or TopBrands.ru, but with more competitive prices.

It’s a major hindrance to the company’s efforts in Russia that their distribution centre remains in the UK — this has a negative impact on delivery times to Russia, introduces potential complications with cross-border procedures, and discourages Russian customers from ordering in cases where they are unsure about sizing, etc., since there is quite a large cost and time loss in the case of returns.

Overall, it is a good sign that ASOS is trying to accommodate current and future Russian customers — a Russian site and social media presence definitely help to reach out to aspirational Russian customers. But if one of the goals is to target such aspirational customers, it makes sense to have a social media presence on VK in addition to Facebook.

In summary, this “Russian launch” is basically a translation of their English site. The company hasn’t undertaken any true localization of its operations and will thus have limited effectiveness in expanding its addressable market in Russia.

 

QIWI IPO Analysis

Should you wee-wee on Qiwi?

Should you wee-wee on Qiwi?

QIWI plc (“Qiwi”) is in the midst of an IPO roadshow and has filed a fairly complete F-1 with the SEC, as it proposes to go public on the NASDAQ.

The following are some of the salient points concerning Qiwi’s proposed offering and its underlying business.

The transaction

The offering is all about providing liquidity to existing shareholders. All funds being raised are going to the existing shareholders – no cash is being received by the company.

The offering is of 12 million American Depositary Shares representing (under) Class B shares of Qiwi, at an estimated offering price range of $16-18, which values the total transaction at $192-216 million before underwriting fees. At this price, the entire equity of the company is being valued at about $900 million, or slightly over 3x its 2012 annual revenue, which is more than twice the value of the recent private combination of Sberbank and Yandex.Money.

An additional 3.6 million Class B shares have been reserved for issuance under the company’s employee stock option plan, of which 2.2 million have already been awarded to 34 insiders.

The Class B shares have vastly inferior voting rights compared to Class A shares — each Class A share is entitled to 10 votes compared to each Class B share.

In addition to its officers and directors, Qiwi’s corporate shareholders include publicly-listed Mail.ru (20.6%) and Mitsui (14.5%).

As a result of the dual share class structure, existing shareholders will control 97.1% of the voting rights following the proposed IPO.

The business

Qiwi is an electronic payment processor which operates a network of kiosks and payment terminals in Russia (population, 142 million) and Kazakhstan (population, 17 million), and also offers virtual wallets, similar to PayPal.

Typical indoor Qiwi kiosk

Typical indoor Qiwi kiosk

In 2012, total revenues were under $300 million, about 90% of which were earned in Russia.

The company has two principal business segments:

  • Qiwi Distribution (2012 revenue ~ $174 million): Qiwi offers a network of about 129,000 payment kiosks and 40,000 terminals where customers can pay their bills and transfer money in cash, sort of like a reverse ATM. This appeals to those who prefer cash-based transactions due to convenience, anonymity, and also in smaller value, time-sensitive situations. Perhaps the largest individual segment of their payment volume is from customers topping up their mobile phone balances during times when fee-free methods are not practical.
  • Virtual Qiwi Wallets (2012 revenue ~ $116 million): Qiwi also offers an e-wallet system. It has branded its e-wallet as the “Visa QIWI Wallet” since November 2012, and has about 11 million virtual wallet customer accounts. The company also sells Visa-branded prepaid cards.
How Russians use e-wallets

(Source: TNS, based on a consumer survey conducted in Feb-Mar 2012)

As a payment processor, their critical business metric is “average net revenue yield” which are fees as a percent of total transaction value:

2010 2011 2012
Qiwi Distribution 0.69% 0.61% 0.61%
Virtual Qiwi Wallets 1.11% 1.05% 0.82%

(Source: Qiwi F-1)

The company also earns an increasing amount of fees fromvalue-added services” which are essentially ads it displays on its kiosks and sends via SMS to its registered users. Qiwi generated advertising revenues of about $15 million in 2012, up 73% from the prior year. The revenues are not separately reported and are presumably attributed to the Qiwi Distribution segment, which even further underlines the erosion in transaction fees — instead of being flat in 2012, the average net revenue yield would have been 0.56% were it not for advertising.

Qiwi has a large base of customers: the company states that 65 million consumers use its kiosks and terminals at least once a month. Stripping out the 15.7% of Russians under age 15, the company is asserting that it does business with more than half of the entire Russian population. This seems far fetched. Since they don’t necessarily know the identities of their kiosk customers, it would be more believable if they asserted that their kiosks are used 65 million times per month.

Looking at the company’s gross margins, there’s a curious dip in the Cost of revenue line between 2011 and 2012. During a period when revenues increased by RUR753 million, the cost of revenues actually went down by RUR119 million in absolute terms. This significant movement is unexplained in the MD&A.

Management seems ill equipped for running a public company, particularly in the heavily-regulated financial services sector and one subject to US financial reporting standards. The Chairman of the Board is all of 33 and the median age of the executive officers and directors listed in the prospectus is 39. The CFO has no formal accountancy qualification or even financial training. Their auditors found a material weakness in the company’s internal controls in 2011.

Competition

Qiwi faces intense competition in both of its major segments.

Typical outdoor payment kiosk

Typical outdoor payment kiosks (Qiwi’s machine is on the left)

While they are the biggest kiosk network, this type of business (by its nature) does not automatically lock in customer relationships. The Qiwi brand is well recognized in Russia, providing a certain level of consumer confidence in their terminals, but so are the other major dedicated cash payment networks like Elecsnet and Cyberplat.

The business is also vulnerable to some of its biggest customers encroaching on Qiwi’s turf, in particular the Big 3 telecom companies (Beeline, MTS, and MegaFon). As discussed in the prospectus, the Big 3 are exerting heavy pressure on Qiwi’s fees, to the extent that Qiwi has introduced more consumer fees to compensate. So, the fee structure of their core business model is unstable and experiencing stiff downward pressure.

Bank ATM networks in Russia also accept cash payments and are a source of significant competition. Sberbank, the largest domestic bank, operates a network of 68,000 ATMs and self-service terminals. While bank customers are withdrawing cash, it’s natural that they would pay their bills and top up their mobile phone balances at the same time, especially as such services are generally offered to customers on a commission-free basis.

To a certain extent, e-wallets are displacing the current method of paying in cash via kiosks and terminals. And in this, faster-growing segment, Qiwi is the #4 player in Russia and competes against such well-backed adversaries as Sberbank/Yandex.Money and PayPal, which has recently received a licence to offer Ruble payment services.

Not only this, but one of Qiwi’s main shareholders, Mail.ru, operates a competing e-wallet service called Money@Mail.ru, which had a greater mind share than Qiwi in terms of e-wallet providers (as of the latest publicly-available statistics obtained in Feb-Mar 2012, according to TNS).

E-wallet providers in Russia

(Source: TNS, based on consumer survey in Feb-Mar 2012)

However, in terms of actual usage, the statistics on Qiwi wallet are more encouraging:

Usage of Russian e-wallet services

(Source: TNS, based on consumer survey in Feb-Mar 2012)

The penetration of traditional credit cards continues to grow too. Russia is experiencing a roughly 30% annual growth in plastic credit card issuance, with about a 40-50% increase in credit card transaction volume. Russian consumers are increasingly comfortable using their credit cards for online and offline purchases.

At the same time, new and innovative payment methods such as those based on Near-field Communications are being introduced to Russia.

The future

Smartphone-based payment services are being introduced in Russia

Smartphone-based payment services are being introduced in Russia – this particular NFC payment service is being promoted by Mastercard Russia and MTS

One can say that the success of Qiwi’s legacy kiosk and terminal payment business is inversely related to the modernization of the Russian payments sector.

Fees as a percent of each transaction are already stagnant in their core business and have nowhere to go but down.

While e-wallet revenue is rising rapidly and is offsetting the stagnation in their core business, this is due to volume growth, which has particularly spiked in the last fiscal year and which growth is difficult to reliably project in future.

Particularly concerning is the 22% drop in average net revenue yield from the Virtual Qiwi Wallet business between 2011-12, as this is the segment on which the company’s revenue growth largely depends.

Moreover, the company is not the market leader in this segment and faces very well-funded and committed competition from the likes of state-backed giant Sberbank and global leader PayPal.

Alternative payment technologies are being introduced rampantly in Russia, as the current antiquated system makes it an excellent candidate for payment technology leapfrogging.

Citibank Elecsnet kiosk in Moscow

Citibank Elecsnet kiosk in Moscow, located alongside Citi’s ATMs

As just one example, Citibank, one of the most active foreign retail banks in Russia, has a partnership with Elecsnet — a Qiwi competitor with a far smaller network of about 3,000 kiosks — which allows Citibank MasterCard PayPass top-ups through Elecsnet kiosks enabled with RFID technology. Some kiosks are even co-located with Citibank’s traditional ATMs (pictured at left). Citibank customers can also repay their loans and credit card balances in cash through Elecsnet kiosks. Of course, Citibank customers can also pay their mobile, Internet, and other bills through the Citibank ATM network, commission-free.

Speaking specifically of e-commerce, we work with a number of companies and have fielded thousands of customer enquiries. We haven’t had a single customer pay with their Qiwi wallet, or even request that we support it. As the chart above indicates, Russians tend to use e-wallets for paying mobile phone and Internet service fees, and relatively low-value Internet purchases, particularly for those who are underbanked, e.g. younger people who don’t have full banking and card privileges.

The upshot

Qiwi’s IPO reminds me of the song by The Doobie Brothers, Takin’ It to the Streets, in particular this line: “I ain’t blind and I don’t like what I think I see.”

Head for the hills

Head for the hills, just like the existing shareholders!

Seriously, this seems like a textbook case of a transaction and company to avoid, chock-full of red flags.

Of course, all of these negative points could be counterbalanced by valuation considerations once the IPO price is set, and in the immediate aftermath of trading (assuming the offering goes ahead). I haven’t taken into account pure supply and demand considerations for the company’s stock.

Unlike in most cases where the customary 180-day lockup period serves its purpose to help stabilize the stock in the period immediately following the IPO, in this case the entire offering is of a new class of shares so initial trading will be concentrated with the new shareholders and the investment banks who serve as market makers.

While the existing Class A shares are convertible into Class B on a 1:1 basis, this is unlikely to occur given the valuation premium which should accrue to the Class A due to their superior voting rights.

In addition to the 12 million Class B shares being offered publicly, there are slightly over 1.1 million such shares vesting under employee stock options, which will become eligible for sale in January 2014.

So, from a trading perspective it makes more sense to sell out-of-the money put options at the outset. Even better, sell the shares of any asset managers who were stupid enough to buy into this offering! We’ll revisit this deal in February 2014.

 

E-commerce in Russia: Seizing the Opportunity [re-post]

I’ve recently contributed a two-part article, co-authored with Ken Walsh of the US Commercial Service in Moscow, to the Pitney Bowes Global Ecommerce Solutions blog:

Part 1The State of Russian Ecommerce and the Potential for Growth

Part 2Digital Strategies for Entering the Market

 

Amazon’s Entry into Russia: Transcript from Voice of Russia Radio

Transcript from Voice of Russia radio, 19 April 2013, with Dan Moody and Peter Prabhu, discussing Amazon’s entry into Russia.

Dan: Talking to the Voice of Russia about Amazon’s move into the Russian market. This is Peter Prabhu, a Managing Partner of Interstice Consulting and head of their branch in Russia.

Peter: [on why Amazon has been late to Russia] They’re a company that is looking globally and if you compare the opportunities in Russia with about 140 million people to China and India, I think from their point of view the potential of those markets is far greater. What Russia has going for it is per-capita income is a lot higher than these other couple of markets that I’ve mentioned but it’s still quite a difficult place to do business if you’re not on the ground. I’m sure they’ve looked at those two big players that you’ve mentioned as potential acquisition candidates and I wouldn’t rule that out in the future because, as a global company, it just makes logic that they should have a presence in Russia, but I’m not sure that those two companies are really extremely profitable from a bottom-line perspective. And neither is Amazon, for that matter, in the global scheme of things.

Dan: How do you mean it’s not “in the global scheme of things?”

Peter: I mean, compared to their sales and those of a typical offline retailer, Amazon’s been focusing on growth vs. profit margins. So if you look at their overall basic profit margin and gross profit margin it’s not as high as one would expect from an online retailer without those expenses of physical distribution retail outlets.

Dan: Do you think it’s a wise decision then for Amazon to establish kind of a ground presence? Do you think in that case it might be too much of a stretch for Amazon?

Peter: Well, yeah, I think the strategy makes sense to lead with digital in the Amazon name. They are already in Russia in a fairly big way just selling cross-border even though they may not have a local office. Cross-border sales in Russia were over $1 billion last year out of a total market of about $12 billion so people are buying from abroad and getting their packages delivered directly through international courier services. But it’s just been surging recently and actually the Russian Post has shut down as they’ve just been inundated with parcels from abroad. Even last week one of my clients, they were trying to send a package to a Russian customer through EMS where Russian Post takes care of their local services, and they’re not accepting packages coming to Russia through EMS.

Dan: Although you said your experience with Russian Post hasn’t been too bad in some of your e-commerce ventures, didn’t you?

Peter: Well, it depends on which service you’re running and where it’s being delivered. With Russian Post we haven’t really lost anything it just sometimes takes time. There have been just a couple of instances where we’ve lost packages. And the rates just are the only thing we can use in far-away places. It’s just not economical to service customers in Chukotka and places like that with private courier services. It’s the only option available and those customers are aware of that too, so it’s either buy something that they can get or do without. There’s just a lack of choice in the regions.

As I understand, Amazon’s strategy in Russia is the intellectual property so it’s distribution of digital products like Kindle e-books and other apps through their AppStore. I’d be surprised if they’re jumping into local physical goods and importing things and having a distribution centre here. I don’t think it’s really worth the investment of starting things off the ground so either they would be better off getting into it through acquisition of a local company… and there’s also an emerging segment of players who are offering stores on behalf of foreign companies so they would have a shared environment. That’s also a potential entry point.

Dan: Would you say now is probably one of the best times for certain types of companies to try and get involved in e-commerce?

Peter: I think a lot of people are pointing towards these next few years as an inflection point in the growth of the Russian e-commerce market. Partly that’s to do with more internationalization. People are more comfortable shopping abroad and using their credit cards and there’s just more stability, let’s say, in the general environment. We see that in our own projects — the percentage of people paying online vs. cash has grown dramatically in the last couple of years. That’s one thing in its favour. We still have these bottlenecks with physical distribution across the country. That’s not going to go away any time soon.

But from an international perspective, these companies that have been slow to the market, like Amazon, like eBay, have seen that Russian companies have basically taken over that gap in the market, by servicing Russian customers in their own language and with a local office. So I think that because, most of these companies acknowledge that the future is from emerging markets and international markets, that they need to be there on some level because that’s where their growth is coming from in the future. They are international to begin with, now.

Dan: It’s hard to ignore when you see the local players like the Russian Amazon equivalent. They’re making year-on-year, huge growth.

Peter: Yeah, on one level that’s true  but it’s also a massive investment of resources to get into Russia because things are so specific here. Companies, let’s say not the giants of Amazon but mid-sized companies who are doing well elsewhere have depended on, let’s say, Google and their advertising network or social media marketing through Facebook and these two properties, which are quite massive internationally, are by far from the leaders in the Russian market so you have to kind of adapt your marketing strategies to these realities.

Dan: That was Peter Prabhu, Managing Partner of Interstice Consulting and head of their branch in Russia talking to me, Dan Moody, for the Voice of Russia.

Link to MP3

Amazon Enters Russia

amazon.ruNews is breaking today by Forbes Russia and RIA-Novosti about Amazon’s plan to open a Russian office. Subsequently, posts appeared on TechCrunch and Engadget about the move, but there has been no corroboration by the company.

While the rumours about this have been circulating for months, this is the first time concrete details have been published by the international media. Speculation had initially arisen from reviewing openings on Amazon’s recruitment website, several of which request Russian market experience and language ability. At least one Russian-based employee, Arkady Vitrouk, lists himself as affiliated with Amazon Kindle on his LinkedIn profile. This seems to be a common way of uncovering new entrants in Russia before their official announcement, as it also occurred with Kayak’s recent opening in Russia.

It appears that Amazon’s strategy in Russia is to initially focus on digital media products such as Kindle e-books and other downloadable software, digital music and apps. While these are logical stepping stones as they avoid Russia’s notoriously inefficient and expensive distribution channels, selling digital media products in Russia is very challenging given rampant illegal downloading.

While Russia’s accession to the WTO promises to tighten up enforcement, no significant action has yet been detected, nor is anticipated in the near term. Indeed, one of the reasons that VK, Russia’s leading social media network, is an outlier in terms of minutes of use per user per day, is the ease in which its users can freely access digital media files.

Of course, Amazon is already very active in Russia as a cross-border seller of physical and digital products. Market estimates for 2012 are that Russians purchased online about $1 billion of out of a total of $12 billion through international sellers which had no physical presence in Russia. eBay alone is reporting that their Russian sales amounted to $400 million in 2012. Given these market measures, Amazon’s sales of physical goods in Russia are easily in the hundreds of millions of dollars.

So, another practical reason for Amazon establishing a Russian branch is the need to deal with the sale of physical goods to its Russian customers, as the company must surely be seeing volumes in Russia explode. Their cross-border sales are likely already facing capacity constraints, since each order must go independently through Russian customs, and shipping costs must be eating into profit margins. So far in 2013, there has been a massive surge in cross-border e-commerce imports, to the extent that EMS-Russian Post is currently limiting the volume of new international parcels it will accept, while it deals with a backlog rumoured to total about 500 tonnes.

Russian Post backlog

Russian Post’s backlog of unprocessed parcels stands at 500 tonnes!

Amazon’s localization options in Russia include building an independent distribution network, working with a Russian logistics partner, or acquiring these capabilities from an existing company. There are only a handful of realistic acquisition options for the company, and none of these companies are likely to object to a fair offer since most have already planned IPOs to provide liquidity for their shareholders as well as expansion capital.

In the longer run, Amazon certainly does need to be “on the ground” with a localized Russian offering in order to maintain its global standing as an e-commerce leader. With cash-on-delivery accounting for up to 80% of sales at Ozon.ru (the “Russian Amazon”), the “real” Amazon is severely limiting its addressable market in Russia by only operating as a cross-border player.

Another US-based behemoth, eBay, has announced aggressive plans for expansion in Russia, although they function as a platform for other sellers and don’t have to take on the cause of improving the physical distribution environment, other than encouraging efficiency and transparency as a means of increasing the volume of transactions occurring on their platform. To a large extent, US-based e-commerce companies have conceded the Russian market to local players and European companies until now. All significant global e-commerce competitors are also eyeing Russia. Even China’s most prominent e-commerce companies are moving in on Russian territory.

And in the even bigger picture, all retailers with global ambitions — including those which primarily focus on offline channels — must make a serious assessment of their Russian market potential. Emerging markets are where their growth will increasingly originate – there’s no denying the impact of the massive demographic changes taking place, which will shift economic power from West to East.

 

PayPal is Granted Licence to Operate in Russia

Just to close the loop on our previous post about PayPal’s putative entry into Russia, the company disclosed on its official blog on 15 March 2013 that its application for a licence to operate in Russia as a Non-Banking Credit Institution was approved by the Central Bank of Russia.

Depending on how it’s measured, PayPal is either the #4 or #5 e-wallet service in Russia, behind Yandex.Money, WebMoney, and Qiwi. Acquiring a Russian licence will enable PayPal to compete more effectively with its Russian-based rivals. Further, eBay’s aggressive Russian expansion plans should provide further support to PayPal’s growth in Russia.

We extend our congratulations to PayPal and look forward to heightened competition (and lower costs) for Russian e-commerce consumers and businesses.

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Domain Name Disputes in Russia

scales of justice

Russian domain name disputes are not as daunting as you might think

The “land grab” over international top-level domain (TLD) names has often allowed opportunistic trademark infringers to pre-empt legitimate brand owners.

Russia is no exception, and one of the prime issues faced by foreign companies and brands entering the Russian market — whether they are primarily online or offline players — is securing the rights over their domain names in the Russian TLDs.

If your brand has any degree of international visibility, it is quite likely that it has already been registered in the Russian TLDs. Indeed, should you find that your desired domain name is actually available in the Russian TLDs (especially within the .ru space), it would indicate that your brand has an uphill battle to gain market recognition in Russia!

High-profile domain name disputes in Russia have involved leading international companies such as Nike, Century 21, Burger King, Forbes, Kodak, Volkswagen and many more. All were decided in favour of the foreign entity although the process and length of the dispute procedures has varied widely, with the earlier cases taking much longer to decide. As the precedents accumulate, enforcing rights over Russian domain names is becoming a much more predictable and economical process for foreign companies.

Russian Top-Level Domains

There are actually three Russia-specific TLDs, namely:

  • .ru (“Russia”)
  • .su (“Soviet Union”)
  • .рф (“Russian Federation” in Cyrillic script)

There is also the “.com.ru” domain administered by one of the Russian domain registrars, as well as “.ru.com”. Some foreign companies which find themselves shut out from their rightful .ru TLD temporarily, have opted to establish their Russian websites on these less-than-ideal alternatives (notably PizzaExpress).

Legal environment

There is no Russian law specifically covering rights to Internet domain names. Rather, they are covered under the existing laws related to intellectual property and, in particular, trademarks.

The Kodak case of 2001 was a landmark in this field (the core of the case being the use of a trademark in a domain name). The court decided the case solely on the basis of international law (namely, the Paris Convention, to which Russia has been a party since 1965). The federal law on trademarks that existed at that time did not provide protection against the use of a trademark in a domain name. Still, the court prohibited the usage of the domain name in question.

Since then, the Russian courts have acquired substantial experience in resolving intellectual property disputes related to domain names. There are guidelines set out by the highest courts on such matters which are obligatory for lower courts to follow, even though — officially — case law does not exist in Russia, being a civil law country.

As for international law, the World Intellectual Property Organization (WIPO), a body of the United Nations, plays a role in resolving .com, .net and .org domain disputes as well as many country-specific TLDs. While Russia has been a member of WIPO since 1970, the Russian TLDs are not under WIPO’s purview.

Court system

For commercial disputes in Russia, there are two branches of the court system which could come into play:

  • The State Arbitral (arbitration) court system hears commercial cases involving legal entities, registered private entrepreneurs, and state enterprises, whereas
  • The common (general) court system hears civil disputes between natural persons who are not registered as entrepreneurs, and also hears all criminal cases.

For the purposes of foreign legal entities involved in domain name disputes in Russia, the arbitration court is the proper choice except in the case of “substantial damage”, which can be considered a felony and would be heard by the general court.

New Court for Intellectual Property Rights

The Court for Intellectual Property Rights is a specialized court within the system of Arbitral courts, located in Moscow, which hears disputes related to intellectual property regardless of the nature of the legal parties to the dispute. In addition to being the court of first instance in such matters, it functions as a cassation court. While legislation establishing the Court was passed in 2011, judges were not appointed and it did not start functioning until February 2013, so it is quite new.

Court proceedings

The first thing to ensure is that you have registered your trademarks in Russia, as these documents must be submitted to the court in order to commence any proceedings.

While the law provides that administrative rulings can be made solely on the basis of written submissions, domain name disputes do not fall under such criteria.

There is also the possibility that the arbitration court would award a preliminary injunction prior to filing and hearing the court case, although this is unlikely to happen in the case of domain name disputes. The cases where courts have awarded preliminary injunctions in intellectual property disputes are highly limited.

Initiating a claim via the arbitration court is fairly straightforward, and the procedural rules dictate that cases must be decided within 3 months (although they are usually extended to 4 months). Delaying tactics are often employed by defendants. However, as a rule, it is quite difficult to extend the 4-month period under the arbitration court system and the majority of cases are decided within this time limit. The only case where it can be extended is when an independent expert is involved (usually this occurs when trademarks need to be analyzed as to similarity with the original, and would not include domain name disputes). When experts are involved, the period can be extended considerably (8-24 months).

For foreign entities, in addition to the statement of claim, they must submit a power of attorney authorizing a local person to represent them (who does not need to be a lawyer), as well as certified copies of their incorporation documents and registration certificates for their trademarks and/or patents. All documents must be translated into Russian.

A predictable process

Overall, the procedures for settling domain name disputes in Russia are becoming increasingly transparent and predictable, and help to support the overall growth and international appeal of Russian e-commerce.

BayRu is a US Exporter of the Year?

News recently came out that Bay.ru was named as an ‘exporter of the year’ by the US Government’s Department of Commerce (press release).

We congratulate Bay.ru and believe this development underscores the huge potential for e-commerce in Russia. Their whole business model is predicated on exploiting the frictions in cross-border retail between the US and Russia, some of which include:

  • Major differences in prices, driven by customs and VAT exemptions for individual imports
  • US companies which ignore the international market
  • Russian consumers who prefer to transact in the Russian language, using Russian payment methods
  • Scarcity of selection available from Russian retailers

While there is a movement underway from Russian e-tailers to pressure the Russian government into enacting policies to address the customs and VAT price distortions, the other factors are not destined to change any time soon.

Still, it is misleading to name BayRu as a major exporter when they are basically functioning as a logistics and fulfillment agent on behalf of Russian consumers. We might as well name FedEx, UPS and DHL as super exporters as well.

 

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