Luxury goods are unlikely to be affected by Russia’s position in the gray market
The Russian government has given the green light to parallel imports following a wide range of Western brands halting their operations in Russia following its invasion of Ukraine. Russian Prime Minister Mikhail Mishustin said on Wednesday that retailers are free to import and sell branded products without explicit permission from brand owners, potentially opening the door to free movement of gray market products in Russia. – or authentic products bearing a trademark produced in one market (i.e. a country or an economic zone) which are then imported into another market and sold there without the consent of the trademark owner.
The announcement comes after the Krelim previously hinted that parallel imports could be allowed into Russia, as various sanctions, widespread logistics/supply disruptions and intense stakeholder pressure prompted most companies retail companies – from H&M to Hermès – to temporarily suspend operations in Russia, depriving consumers of a wide range of goods and services.
“The legalization of parallel imports in the current environment will increase the number of economic entities importing goods into Russia, [which] will saturate the domestic market with the goods consumers need,” Maxim Shaskolsky, head of Russia’s Federal Antimonopoly Service, said last week amid reports that Russian retailers were “struggling with[ing] find ways to combat their growing isolation in the face of sanctions,” including the path of gray market products. Reports have also indicated that Russia may seek to “supplement or completely replace products from brands” that have left the Russian market (for the time being, at least) “with products of similar quality and design” from companies in China, India, Iran and Turkey.
The legality of the gray market
In terms of the legality of parallel imports, the law in Russia has been flowing, with “current Russian law prohibiting parallel import”, according to Anton Bankovskiy, the head of intellectual property at CMS in Moscow, but the Federal Anti- Russian monopoly “trying for several years to legalize parallel imports into Russia”, and with “rulings by the Moscow Commercial Court aimed at strengthening this position”. A Moscow court imposed a loss on Daimler in a decision in August 2021, for example, preventing the German auto giant from preventing third parties from importing genuine auto parts into Russia that Daimler had previously released in other markets.
In this case, in which Daimler unsuccessfully sought to block the further sale of its auto parts in Russia, and in a similar dispute initiated by a Japanese manufacturer of hydraulic equipment, the Moscow City Commercial Court “concluded in general that the sale by [unauthorized third parties] of legally purchased goods bearing the manufacturer’s mark does not, in principle, constitute a violation of [the trademark holder’s] exclusive rights.”
Despite a growing number of court rulings that have found that bans on parallel imports violate national competition law, exceptions to these “trademark exhaustion” rules do in fact exist, with courts holding that if imported goods at issue deviate significantly from the condition in which they were when the brand owner (or authorized retailer) first placed them on the market, they may give rise to causes of action in trademark matters and may be subject to a withdrawal order. This principle has been a key tool for luxury goods in cases around the world centered on gray market products, with brands arguing that the terms under which otherwise authentic products are offered are at odds with those under which they are offered. would normally be sold, thereby causing the goods and the terms of sale of those goods to be “materially different”. It wouldn’t be surprising if brands seek to crack down on the unauthorized sale of gray market products in Russia, although it’s unclear to what extent Russian courts would be amendable to provide remedies for Western brands in countries. “unfriendly” at present.
There’s another potential outcome, and one that might actually be more likely than legal battles – depending on the brand, of course – if Russian retailers seek to make up for the lack of luxury brand operations in the country with products of the gray market. Depending on how long the side effects of Russian sanctions last, including the ruble’s rock bottom and major shipping and sourcing quagmires, Russia’s luxury goods ecosystem could begin to mirror that of China, which regularly sees a large supply of gray market products. passing through multi-brand stores in places like Italy and landing on the mainland after passing through agents in Hong Kong, often with brands playing some role in this situation.
As we reported earlier this month, in the event that luxury brands’ standalone stores and e-commerce businesses do not return in a timely manner (and they continue to face pressure to distance themselves from this market ), luxury brands may choose to look the other way, allowing multi-brand stores in other markets to order excess quantities of goods and ship them to Moscow with the help of parallel importers to offset the relatively small percentage of sales they’re not currently getting from that market, assuming they’re not compensating for that with increased sales from oligarchs and other deep-pocketed Russian individuals who have moved to places like Dubai . (These products would likely flow through another country, such as Turkey or Uzbekistan, and then on to Russia.)
It should be noted that while the Russian Ministry of Economic Development may be able to successfully lead a charge to replace common consumer goods with alternatives from non-Western companies, it would likely have difficulty with products luxury, whose offerings might not be so easily swapped out for “similar” options, at least from a brand perspective.
It is too early to tell how the scenario will unfold. The reality, however, is that fashion and luxury goods are likely low on the totem pole of products that the Russian Ministry of Economic Development will consider necessary to import through gray market trade, especially since such decrees focusing on intellectual property are being presented by the Russian government as necessary for “extraordinary situations where there will be absence of certain goods from the Russian market”.