Russia: Overview of e-commerce

FROM THE ECONOMIST INTELLIGENCE UNIT

Small, specialised companies dominate e-commerce in Russia. The most popular goods ordered online are books, videocassettes, DVDs, CDs, computers and computer software, airline tickets and prepaid telephone cards. There are also a growing number of e-commerce companies in the grocery trade in Moscow and St Petersburg. Some supermarkets, including the Sedmoi Kontinent chain, now offer online ordering. But overall business-to-consumer (B2C) e-commerce in Russia is limited, mainly because of low Internet penetration rates, consumers’ restricted purchasing power and limited use of credit cards.

The overwhelming majority of online sales are paid for in cash upon home delivery. Online debit- and credit-card transactions remain limited because Russians generally distrust retail banking. However, retail-banking services are rapidly developing with the arrival of several major foreign players in the market. Although there are around 30m plastic cards in Russia, only 300,000 of these are credit cards (the rest—the vast majority—are debit cards), and this restricts the growth of online sales.

Other forms of online payment include direct bank transfers, pre-payment cards and digital money. A number of “virtual wallet” sites have been established to address Internet payment needs. These sites receive bank transfers from Sberbank and other retail banks, and then hold the cash on deposit to be spent elsewhere on the Internet.

Business-to-business (B2B) e-commerce consists of distributors’ outlets, marketplaces for small and medium-size enterprises and the first online marketplaces for industrial commodities. Computer and office-equipment sales dominate the first two categories. Industry-based marketplaces have recently begun to develop, notably in the metals sector. B2B trading consists of one-to-one transactions rather than online marketplaces.

E-commerce: Growth of e-commerce

A number of factors have traditionally restrained the growth of e-commerce in Russia. Obstacles include a poor telecommunications infrastructure, an underdeveloped banking system (including very low credit-card penetration rates) and an uncertain legal environment. According to J’son & Partners, a consultancy based in Moscow, there are more than 2,000 e-commerce businesses in Russia. Their sales volume in 2005 reached US$1.2bn, and the market is developing rapidly with annual growth of 45–50% expected in 2006, according to J’son. The National Association of Russian Electronic Trade Participants estimates local online sales at less than 1% of total retail-trade turnover.

J’son & Partners expects Internet penetration (weekly users) to reach 12.9m (or 9% of the total population) by the end of 2006. The firm estimates the annual growth of Internet users will be more than 20% over the next three years, and that one-fifth of the population will be using the Internet by 2010.

A number of factors should stimulate future growth in e-commerce. Russians are literate and well educated, and they will probably prove keen to use the Internet as an information resource. Moreover, the poor choice and regional distribution of goods outside the main cities creates a ready market for web-based retail sites, and limited access to fax and long-distance voice lines will stimulate demand for e-mail services.

The active Internet-consumer community is still almost exclusively in Moscow and St Petersburg, and this community accounts for about 60% of online transactions. If these two cities are taken alone for statistical purposes, and the rest of the country is ignored, then Internet penetration and spending figures more closely resemble those in other transition economies.

In 2001 the Russian government approved a US$2.4bn plan to fund Electronic Russia through 2010, as a means of promoting the use of the Internet, boosting e-commerce and providing equal access to electronic education, which should significantly stimulate the sector.

The first stage of Electronic Russia involved analyses of the use of information technology by the Ministries of Communications and Economic Development and Trade. Pilot projects were run in the regions to test the feasibility of programmes such as filing taxes online to judge whether they would work on a nationwide scale.

The second stage of Electronic Russia aims to make government bodies more transparent by opening their information resources to the general public. A series of pilot projects is planned within and among certain government bodies to assist the ongoing administrative, pension and housing-sector reforms. The ministry has proposed a legislative policy for the use and application of information technology in the economic and social spheres, spelling out what changes to laws are necessary and a timetable for adopting them.

E-commerce: Foreign investment

There are no specific limitations on foreign participation in Russia’s telecommunications industry, and investments are officially subject only to standard licensing and certification requirements. However, in the context of negotiations to enter the World Trade Organisation, the Russian government presented a position paper in 2002 on plans for the telecoms industry after Russia’s admission to the trade body, which would include a 49% limit on foreign ownership of telecoms companies. This plan is still subject to negotiations with Russia’s trading partners, which have strongly objected to the proposed reversal of telecoms liberalisation.

Foreign investors have criticised the system of licensing telecoms companies. They complained about lack of transparency in licensing and about the five-year limitation of licences. The new amended version of the Law on Telecommunications, which came into force on January 1st 2004, lengthens the duration of licences up to 25 years. However, new licensing regulations still await adoption and publication.

E-commerce: Intellectual property

The issue of cyber-squatters and trademark piracy in the realm of Internet domain names remains a major source of concern for both foreign and Russian companies. The Regional Network Information Centre (Ru-Centre, www.nic.ru) took over the registration of domain names from a previous entity, RosNIIRos, that performed the same function in 2000. Although RosNIIROS stop registering domain names in 2000, January 1st 2005 was the deadline for cancelling all registration agreements previously concluded with RosNIIRos.

The poaching of domain names continues, although some companies have successfully removed cyber-squatters. The practice hinders the development of e-commerce in Russia.

Important amendments made to the Trademark Law in October 2002 are expected to strengthen the protection of trademarks on the Internet. Unlike the previous law, the new law specifically identifies the unauthorised use of Internet domain names as an infringement of trademark law (Paragraph 2, Article 4 of the amended law). This new provision has already been tested in practice. The Moscow Arbitration Court found on October 15th 2003 that the domain names gillette.ru and gilette.ru had been registered in breach of the trademark rights of the registered proprietor, The Gillette Company (US). The Gillette Company presented evidence of the appropriate trademark registrations for “Gillette” and “Gilette” for selling goods on the Internet. The court ruled that to prove trademark infringement a trademark proprietor should present evidence that: (1) the mark and the sign in contest are identical or similar, (2) that the goods and/or services for which the contested sign is used on the Internet are similar to the goods/services for which the trademark has been registered, and (3) the sign has been used without the consent of the registered proprietor. All three of those elements were proved in court against the parasite user of gillette.ru and gilette.ru. The court ruled that the owner of the illegal domains should stop using gillette.ru and gilette.ru on the Internet.

In line with the trademark laws of many foreign states, the Russian Patent Office (Rospatent) allows the registration of trademarks in different classes if it believes there would be no confusion on the part of the consumer because of the different class of goods.

Copyright law was amended in July 2004 to increase the copyright term from 50 to 70 years after the author’s death and to give enforcement bodies greater powers. Implementation of the law remains weak for images, music, videos and books. Better enforcement is a major criterion for entry to the World Trade Organisation, which Russia is coming closer to joining; however, Russia remains a producer of pirated CDs and DVDs on an industrial scale. Copyright protection clearly extends to material that has been converted to a digitised format and then placed on the web.

However, Russian copyright law emphasises the rights of the individual author rather than legal entities. Hence, companies that wish to use copyright protection must specifically conclude an “author’s agreement” to transfer those rights from the creator of the material to the company. Russian law specifically regulates the form and content of this agreement.

E-commerce: Consumer protection

Consumers buying goods online in Russia will almost certainly have enforceable rights under the amended Law on Protection of Consumers’ Rights of 1992. Where a product is sold or imported for sale in Russia, the product’s description and instructions for use must be in Russian. Any goods that fail to include Russian language instructions are in breach of product-liability legislation. When goods are faulty, consumers are entitled to free repair of the defect, compensation for all costs incurred by the customer for such repair, a proportional decrease in the price of the product, replacement of the product or return of the purchase price. Relief in the form of damages and compensation for moral harm also is available to the consumer.

Improving the protection of personal data in e-commerce is an area that the Russian legislature wants to address. In accordance with the general privacy guarantees in the Russian Constitution (Articles 23 and 24), the specific provisions of Federal Law 24-FZ, On Information, Informatisation and Protection of Information (amended January 10th 2003) and Federal Law 85-FZ, On Participation in the International Exchange of Information (amended June 30th 2003), the collection, storage, use and dissemination of personal data to third parties is allowed only with the consent of the data subject or by court judgment. Under the Law on Information, personal data is defined as data on facts, events and circumstances of the life of an individual, which allows his/her identity to be revealed. This applies to anyone collecting or transferring personal data to third parties over the Internet.

These basic rights offer individuals strong protection in principle, though they have yet to be tested in court in relation to the Internet. Furthermore, unlike many other countries, Russia has not yet adopted regulations or guidelines covering these principles and their application to the new arena of the Internet and digital communications.

Russian websites are classified as advertisements under the present Advertising Law, and they are subject to considerations on such issues as bad faith, unfair, unethical and false advertising. Virtually all portals that sell their space for advertisements therefore carry meters to show figures on the number of visitors to their website. Since these figures largely determine the price of placing advertisements on a website, portals must be careful to avoid publishing false information.

The transparency of Russian Internet resources has increased with the research provided by four companies in particular. These are Rambler Group, Spylog, Gallup Media and Comcon-2. Rambler Group and Spylog place their meters on the pages of the sites being surveyed, whereas Comcon-2 and Gallup Media conduct public-opinion surveys. Rambler registers the number of hits for individual pages, and Spylog registers the number of visits an entire site receives.

The legal status of sites containing erotica remains unclear. In general, the law prohibits the distribution of pornography. The status of websites and the links found in them, however, is unclear since websites are arguably not categorised as mass media. Unlike in the United States, where individuals can be prosecuted for placing links to sites that contain illegal information, there are no laws regulating links in Russia, and everything depends on the individual court’s discretion.

E-commerce: Contract law and dispute resolution

The enactment of Federal Law 1–FZ, On Electronic Digital Signature (January 10th 2002) marked an important new development in Russian e-commerce.

The objective of any e-commerce legislation is to take established contract principles and apply them to Internet transactions. The electronic signature represents a crucial feature in this process. Articles 160(2) and 434(2) of the Russian Civil Code recognised electronic signatures but only where there was a prior mutual agreement between the parties to use them. This had been understood to mean that a written agreement between contracting parties specifically agreeing to the future use of digital signatures, and establishing relevant procedures for future dispute resolution, would be needed to validate subsequent online transactions. This clearly constituted an obstacle to the rapid growth of e-commerce, since most potential consumers lack such an agreement, and so their consumer rights would not be protected for purchases made via an electronic signature.

The latest law on digital signatures establishes specific rules on which types of electronic signatures will be recognised by law. Market participants have criticised it, however, because of its strict definition of an electronic signature. The biggest criticism is that the law recognises one technology (public-key technology) as the only acceptable basis for digital signatures. The law also requires the certification of both hardware and software used for digital signatures, and the establishment of certifying centres in Russia, licensed by the state, that would review electronic digital signatures. Such certifying centres have been created in Russia.

The State Duma considered several drafts of electronic-commerce law that could have further clarified the legal basis of e-commerce in Russia and added protection to participants in e-commerce transactions. However, all the drafts have so far failed to become law.

Where electronic signatures are recognised as legally binding, contracts are subject to the normal rules governing enforcement of contracts in Russia (in particular, the Russian Civil Code) and subject to enforcement through the Russian commercial courts.

Russia has not acceded to the Uniform Domain Name Dispute Resolution Policy (UDRP) established by the Internet Corporation of Assigned Names and Numbers (ICANN). This is the most common international method of dispute resolution in domain-name cases. Consequently, trademark law governs domain-name disputes in Russia through domestic courts.

E-commerce: Basis of taxation

The Russian Tax Code of January 1st 2001 does not impose any special tax burden on electronic transactions. Hence, taxation of e-commerce is comparable to that of similar transactions using non-electronic means. Even so, in practice, goods purchased and delivered via the web are often not taxed if paid through non-traceable means (not through a bank transfer), because there is no way to track and calculate such transactions.

Online purchases delivered to the consumer in material form are subject to all applicable excise taxes. Goods that are imported are also subject to customs duties. But customs officials maintain strict signed and stamped documentation requirements, and it is unclear whether online electronic contracts, which lack such formalities, would be sufficient for customs clearance.

Under present legislation, the main criteria in determining if a foreign company is subject to profits tax is whether that entity has a permanent establishment in Russia. Although there has been no specific legislative guidance on this issue, the tax authorities would probably consider a permanent establishment to exist only if the physical hardware necessary to support e-commerce is in Russia. A question remains over whether the registration of a domain name in Russia constitutes a permanent establishment for the purposes of profit taxation. With no legislative guidance or case law, this issue is unclear.

Value-added tax (VAT) of 18% (reduced in 2004 from 20%) applies on electronic transactions related to the sale of goods (work, services) in Russia and the import of goods into the customs territory of Russia. Services include the transfer of title, know-how, trademarks and other intellectual property, and certain consulting, legal, accounting, engineering, advertising and educational services. Liability for VAT will depend on the provider of goods or services having a permanent establishment in Russia. However, tax authorities will have difficulty monitoring online transactions and enforcing these obligations.

E-commerce: Classification of e-commerce transactions

On January 30th 1997, Russia voted in favour of a Model Law on E-Commerce at the 51st Session of the United Nations (Resolution A/51/628). This resolution treats e-commerce transactions as a service. Arguably under Russia’s present media law (June 1998), the Internet is not classified as a mass medium. Therefore, it is much easier to set up an online business than to establish a mainstream media organisation, which requires far-more-cumbersome registration and accreditation. However, online businesses may voluntarily register as a media organisation to enjoy the incentives for mass-media companies that are offered under Russian law.

E-commerce: Compliance and enforcement issues

E-commerce in Russia is still at too early a stage to have attracted serious attention from the law-enforcement authorities. The main issues so far have been over the rights of the security services to monitor electronic correspondence, in the context of national-security concerns.

An amendment to the 1995 Law on Operational Investigations came into force on January 6th 2000. The original law gave the security services the right to monitor various correspondence (from postal deliveries to cell-phone conversations) if they first obtain a warrant. The amendment extends the access of the security services to electronic traffic, but the Russian constitution still requires these authorities to obtain a court warrant before opening e-mails. Nevertheless, the amendment caused concern among free-speech advocates because e-mail, e-commerce transactions and other Internet traffic can easily be monitored without anyone ever knowing, regardless of whether a court warrant has been obtained. With the growth of the Internet, the Federal Security Service and the State Communications Committee issued new regulations (based on their interpretation of the 1995 law) that forced Internet service providers (ISPs) to link their computers to those at the Federal Security Service’s headquarters. However, a Supreme Court ruling in September 2000 overturned the requirement for ISPs to install the electronic eavesdropping equipment used by the security service.

As e-commerce develops, wider official scrutiny of electronic transactions can be expected, especially in the context of heightened official concern about money-laundering and illegal evasion of taxes and customs duties. Some Russian tax officials reportedly hope that the growth of e-commerce will improve their efforts to enforce compliance, since online commercial activity may be easier to track. But Russian officialdom is typically preoccupied with formal documentation rather than the substance of a transaction. Given the paperless nature of electronic commerce, it may take some time for the enforcement authorities to adapt to the new medium.

E-commerce: Key contacts

• Central Bank of the Russian Federation, 12 Ul Neglinnaya, Moscow 107016; Tel: (7.095) 771 9100; Fax: (7.095) 621 6425; Internet: http://www.cbr.ru.
• Chamber of Commerce and Industry, 6 Ilyinka Ul, Moscow 109012; Tel: (7.095) 929 0009; Fax: (7.095) 929 0360; Internet: http://eng.tpprf.ru. The federal chamber can provide information and contacts to members, as can Russia’s regional chambers of commerce and industry. Representative offices are also in 19 foreign countries. Bulgaria, Canada, the Czech Republic, Finland, France, Iran, Italy, Poland, the UK and the United States also have joint chambers of commerce with the Russian Federation in Moscow.
• Directorate of the Ministry of Taxation for Moscow, Ul Bolshaya Tulskaya 15, Moscow 115191; Tel: (7.095) 980 5035; 957 6410; Fax: (7.095) 958 2558; Internet: http://www.mosnalog.ru (Russian only).
• Eurasia Patent Organisation, 2/6 Maly Cherkasskiy Pr, Moscow 109 GSP-9; Tel: (7.095) 928 5612; Fax: (7.095) 921 2423; Internet: http://www.eapo.org.
• Federal Anti-monopoly Service (FAS), 11 Ul Sadovaya-Kudrinskaya, Moscow 123995; Tel: (7.095) 252 7048; Fax: (7.095) 254 8300.Internet: http://www.fas.gov.ru/english. FAS can provide information about any restrictions on acquiring shares in Russian enterprises by foreign investors. It was known as the Anti-monopoly Ministry until early 2004.
• Government Investment Corp (Gosincor), Ul Myasnitskaya 35, Moscow 101990; Tel: (7.095) 204 1387, 208 9944; Fax: (7.095) 207 6936; Internet: http://www.gosincor.ru (Russian only). Gosincor, a state-owned company, was formed in 1993 to attract foreign investment to Russia and to insure foreign investors against political risk.
• Ministry of Economic Development and Trade, Ul Pervaya Tverskaya-Yamskaya 1/3, Moscow 125993; Tel: (7.095) 200 0353; Fax: (7.095) 251 6965; Internet: http://www.economy.gov.ru/wps/portal/english. The ministry provides general information on the government’s foreign investment policy.
• Ministry of Natural Resources, 4/6, Bolshaya Gruzinskaya, Moscow 123812; Tel: (7.095) 254 4800; Fax: (7.095) 254 4310, 254 6610; Internet: http://www.mnr.gov.ru/.
• Ministry of Finance, 9 Ilyinka Ul, Moscow 100097; Tel: (7.095) 298 9101; Fax: (7.095) 925 0889; Internet: http://www.minfin.ru. The ministry prepares and implements the national budget and formulates taxation and investment policies. Its international tax relations division can be reached at the same address; Tel: (7.095) 925 2396.
• Rospatent (Russian Agency for Patents and Trademarks), Comp 1, 30 Berezhkovskaya emb, Moscow 123995; Tel: (7.095) 240 6015; Fax: (7.095) 243 3337; Internet: http://www.fips.ru/ruptoen/index.htm.
• Russian Authors’ Society, 6A Bolshaya Bronnaya Ul, Moscow 103670; Tel: (7.095) 203 4599; Fax: (7.095) 200 1263; Internet: http://www.rao.ru.
• State Registration Chamber (SRC), Smolensky Bulvar 3/5, Moscow 119121; Tel/Fax: (7.095) 246 7200; Internet: http://www.palata.ru.

SOURCE: COUNTRY COMMERCE