Euroset and the State – struggle for business

On Friday EuroSet has published press-release concerning recent problems with mobile phones, that were addressed towards the company, we shall publish it below and later on draw up the whole picture of what has happened:

Property of PRIME-TASS:

MOSCOW, Mar 31 (Prime-Tass) -- Russian police have seized 167,500 mobile handsets worth 530 million rubles from Russia?s largest mobile handset retailer Euroset, Euroset said in a statement Friday.

Following four days of examining imported handsets at customs, the company obtained all the necessary documents for the imports, Euroset claimed. However, the company's merchandise was seized by police without providing any copy of documents stating that the seizure took place, Euroset claimed.

Euroset said that it had sent a complaint about the police's actions to Russian Prime Minister Mikhail Fradkov, Deputy Prime Minister Alexander Zhukov, Russian Economic Development and Trade Minister German Gref, Interior Minister Rashid Nurgaliyev and General Prosecutor Vladimir Ustinov.

Euroset said that on March 21 it received 167,500 Motorola handsets from Singapore. Between March 25 and March 29, customs officials at Sheremetyevo Airport and representatives of the Federal Tariff Service closely checked the merchandise and issued an approval to import the batch. While the company transported the merchandise from an airport terminal, the lorries were stopped by two dozen police officers, who claimed the merchandise had been illegally imported and started holding their own examination, Euroset said.

Without paying attention to provided documents saying that the merchandise had been recently checked and approved, the police officers decided to seize the entire batch and transfer it to Kamos-T company, which was authorised to store the batch for the police, Euroset said. The company is licensed to sell merchandise illegally imported to Russia and confiscated in Moscow and the Moscow Region, Euroset said.

Euroset said that the reason for the raid may be a lack of activity coordination between law enforcement bodies, unfair competition from Euroset's competitors, or blackmail.

Russian police started fighting illegal imports of mobile handsets in mid-2005. Following a number of raids, police have seized several batches of mobile handsets. Reportedly, the seized handsets were later given to several companies authorized to sell illegal merchandize. However, the handsets were transferred at dumping prices with the price for Philips mobile handsets, for example, set at about U.S. $2. Market experts believe corrupted officials could have illegally sold some of the seized handsets without transferring the raised money to the budget.

(27.1626 rubles - U.S. $1)

What’s being divided, by whom?

Case with EuroSet is a demonstration, it’s been a short term since August 2005 when Russia was experiencing crisis on mobile phone market. Police officials gathered officials to cheerfully announce the struggle against illegal import of mobile phones, customs was showing giant boost in taxes. It seemed that everyone should be happy and satisfied. But in this situation it’s different, everything isn’t so unambiguous.

Before ciris’05 share of “grey” market, which stands for phones sold not by companies-representatives of manufacturers in Russia was minimal, holding from 4 to 10 percent. Such market is typical for any country in which operators are not dominating by selling phones by contracts. This term was also used to describe all phones that were not passing custom clearance, or were imported to Russia by semi-legal schemes. These notions should be differentiated, since according to the definition, grey phones do not have manufacturer’s service warranty, meanwhile phones that are imported via various ways with one aim – to lower taxes, they remain official for the manufacturer and still have warranty. I am not trying to say that lowering taxes is a correct way of doing business and it should be encouraged. The State has the right to protect its interests and it is doing it pretty competently when it’s time to gather taxes and look after the procedure.

By results of August and September neither the community, nor customers or companies that were involved in those events did not receive an honest and direct answer to the question: where are the phones that were confiscated in large amounts from the distributors, who were “suspected” in smuggling? The situation is pretty curious, big number of handsets with overall estimated price of 120-150 million USD vanished in vast expanses of Russian Federation. This trick is worthy of best illusionists, it’s not that easy to hide huge warehouse, which takes several days to unload. However it just disappeared from state structure’s radars into unknown direction. The phones from those parcels started to reveal themselves in Regions, they were sold by really low prices which looked like a distraction for small distributors with all this deficit that Moscow and St. Petersburg were facing at that time.

This is where I personally have frank apprehensions, that these phones were donated as charity cases, a minimum of 40% of their initial price was demanded. There is someone who has relation to the operation that was held in August, this person acquired around 48-60 million USD. It’s clear that there were several people, not just one person, but this sum of money is still big enough even for large number of people. As you known, appetite is case that comes with time, a lot of people start to test their destiny and gain as much money as possible out of air. By the end of 2005 MIA officials attended another company and confiscated products for approximately 20 million USD, there were no consequences for this action for them, neither there were any documents presented that would grant this operation’s legality. Basically, once you have epaulets on your shoulders you can just come and take what doesn’t belong to you and later on go on serving. The balance of your welfare depends directly on your impudence and feeling of impunity.

During the process of market legalization majority of companies switched to official delivery methods. This lead to prices rise, deceleration of rate of growth and a lot of side effects. Including the fact that even more foreign companies became familiar with the insights of Russian business, this caused them to review their plans for investments in Russia, credit granting and other stuff. Market’s rate of growth slowed down, and now we can also state its stagnation, in future it’s also might simply go backwards. Despite these events, unofficial delivery channels remained active in Saint Petersburg, handsets are still shipped to Russia via these channels with lowered prices, but the quantity is smaller than it was before. This forced Moscow companies to secure changes in terms of conditions of delivering goods to Russia, see our material related to this topic. Since we wrote that article, another letter signed by Moscow companies was sent, we have it at our disposal.

Ukrainian market has been growing in large numbers since September, the phones are selling superbly well. This market’s secret is simple – it’s only because the Russian-Ukrainian border is so transparent, phones are shipped to Russia in large quantities. Their price on Russian regions is lower by 7-11% than analogue phones distributed by Russian companies who are importing handsets themselves. Considering the fact that federal networks have “expensive” phones, regional players can only buy Ukrainian phones and sell them as if they are originally imported to Russia, not to Ukraine. The warranty in most cases is either “own” or fictive. It’s hard to differ Russian phones from those Ukrainian, the difference is only in serial numbers, and that’s not even typical for all manufacturers.

State’s actions caused instability of the market, put doubtful perspectives for franchise-projects as whole segment of the branch, this also forced small distributors to activate shipments and purchases of Ukrainian handsets. Budget losses from transparent or selective boarders are perceptible (20% of the market).

But let’s head back to current situation regarding EuroSet. The company itself is looking puzzled in its press-release about the actual reasons for confiscating the shipment. Let’s use ancient saying “Search for the one, who sees advantage in this”, other distributors percept EuroSet as wall-eye, since this company is in control of 1/3 of sales in Russia, and is using aggressive strategy in all segments, regions. But it’s rather doubtful that they would dare to do such thing, since they would automatically become next in the list. This is clear to almost everyone and by this time an unusual phenomenon called “corporative solidarity” pops up. Let’s look at this problem in another angle. Since the market got all “white” the need in big bribes disappears as a class, since all goods were important according to the law. For some officials losing control lever and sinecure simultaneously means decrease of social status, forced refusal of buying exclusive cars and villas in the Mediterranean Sea, and other small but awfully pleasant things. And I bet that it isn’t what they want to do. This is where a reason for “confiscating” goods from disagreeable company comes from. Considering the fact that almost all players on the market are following one and the same rules, it’s not only EuroSet that might be affected, it can be everyone, perhaps not today, but tomorrow. And right now the business is no longer willing to pay for the desires of the officials, since it has not yet fully recovered from events in August.

Judging the current situation I can come to conclusion that it is quite transparent. Customs service of Russian Federation has approved consignment of goods, all dues and taxes (including VAT) have been paid, meanwhile at the gateway members of “K” department of MIA Russia await the consignment. Let me remind you that this department is covering high-tech crimes (basically crimes made with the help of handsets, computers, etc), not economical crimes. It turns out that MIA members do not trust customs service that they work normally and legally. Referring to “their sources”, the consignment of goods was arrested, no documents were issued and some staff from EuroSet has even been threatened (passport was confiscated). Interesting to see that a nicely worked through scheme was used again, it’s when confiscated goods are just taken away, no inventory has been made. Who will later on be able to name the original amount of goods, who will believe the customs or staff from EuroSet? The only source you can trust in Russia is MIA. The situation is so ridiculous, EuroSet has such big amount of documented facts on their side, that only one question remains unanswered: will joint offenders from government’s side remain at their positions? It’s not about executors, it’s about those who was giving away such orders. Government’s actions, some of its officials to be precise, remind me of regular robbery. There is no other definition that would describe current situation, really.

Officials seem to have lack of foresight, and it becomes clear now when old questions leak out again and become extremely actual. Where did the earlier taken handsets go, who bought them and at what price? Basing on what court order the goods were classified as illegal, and so on? Greed ruins everything, and in this situation a lot of officials might lose their heads, in fact they should. In case this will not happen, then we can consider distribution of mobile phones as the most risky business in our country. This way confiscation of goods will go on happening and will become habitual action, officials will still be earning money on that. Although “earning” is usually referred to payment for labor, and officials are not familiar with that.

Eldar Murtazin ([email protected])
Translated by Alexander "Lexx" Zavoloka ([email protected])

Published - 18 April 2006

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