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'Apple' crisis in relations between Russia and United States

Author : Georgiy Kuhaleyshvili

Source : 112 Ukraine

The U.S. revealed a scheme of smuggling smartphones, tablets, laptops, interactive watches and wireless headphones with the Apple logo from the United States to the Russian Federation
21:47, 26 October 2020

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Last week, another scandal erupted between Russia and the United States. The FBI, the Customs and Border Protection Service, the Department of Homeland Security and the New York Police Department have revealed a scheme of smuggling smartphones, tablets, laptops, interactive watches and wireless headphones with the Apple logo from the United States to the Russian Federation in the amount of $ 50 million through employees of a Russian airline Aeroflot. The amount of smuggled goods is equivalent to 43% of Aeroflot's 2019 revenue ($ 88.26 million). Ten Russians involved in smuggling were arrested.

Passengers brought Apple products, including stolen goods, on board. In particular, in October 2019, one of the smugglers managed to transport 235 goods in nine suitcases at a time. Aeroflot press secretary Yulia Spivakova denies the involvement of the company's employees in smuggling. After all, the scandal deals a serious blow to the international image of the Russian state and has already entailed ambiguous consequences for Russian-American relations.

Political implications

The scandal worsens the climate of the already difficult relations between Russia and the United States and may not be reflected in Moscow's favor on the diplomatic front. The US State Department has already reacted and revoked visas from 113 Aeroflot employees. It is one thing if the laws and procedures in the field of export are violated by some swindlers, it is another thing if the largest Russian airline may be involved, half of which is owned by the Russian government, and CEO Vitaly Savelyev is a member of the ruling body of the ruling United Russia party".

If the Russian authorities are unable or unwilling to combat the smuggling of goods from the United States, then doubts arise about the Kremlin's ability to adhere to any international or bilateral obligations. Since Aeroflot regularly carried out flights with contraband cargo, Russian customs could be aware of what was happening. At least a passenger with nine suitcases stuffed with electronics can't help but raise suspicion. Mistrust will grow in US-Russian relations.

The scandal erupted at the height of the negotiation process on the fate of the Treaty on Measures to Further Reduce and Limit Strategic Offensive Arms (START-3), signed by ex-presidents Barack Obama and Dmitry Medvedev in 2010. The contract expires in February 2021. Russian President Vladimir Putin proposed to extend START-3 for a year and not introduce any new conditions to it regarding the reduction of nuclear arsenals. However, the United States rejected this proposal, since it looks at the issue from a broader perspective and is interested in joining China to the treaty, as well as "freezing" nuclear arsenals (fixing all the weapons available). The day after the arrest of the smugglers, the Russian Foreign Ministry made sharp concessions and agreed to "freeze" nuclear arsenals in order to avoid further tightening of the US position.

In light of the Apple scandal, US Permanent Representative to the UN Kelly Craft rejected the proposal of Russian Foreign Minister Sergei Lavrov to create a new collective security organization in the Persian Gulf region with the participation of Russia, the United States, China, the European Union, to abandon the military presence of countries that are not related to the region (USA, Turkey), create demilitarized zones. The Americans have been silent on this issue since July 2019. As an alternative to Lavrov's proposal, Permanent Representative Craft called on UN Security Council members to tighten pressure on Iran, which is actively cooperating with the Russian Federation in Syria and supporting Shiite armed groups in other countries of the Middle East.

Moscow is unlikely to expect Washington to soften its stance on the Russian Nord Stream 2 gas pipeline. Following the disclosure of the scheme for the smuggling of Apple products, the US State Department decided to extend sanctions to companies that are not directly related to pipe laying, but provide ancillary services. Even the German port of Mukran, where a Russian engineering vessel calls in, may be under sanctions. The US did not accept the proposal of German Finance Minister Olaf Scholz to complete the construction of two sea terminals for receiving American liquefied gas at the expense of the German state budget in exchange for guarantees not to impose new sanctions against Nord Stream 2.

Trump's image move

The scandal involving a Russian company plays into the hands of President Donald Trump on the eve of the US presidential election. Today he lags behind his Democratic rival Joe Biden in ratings. The owner of the Oval Office is developing an image of a defender of the interests of American manufacturers. The disclosure of the scheme for the Russians smuggling Apple products demonstrated the professionalism and coherence of the work of various special services and departments, and Trump actually proved that he does not throw words down the drain and suppresses any attempts to illicit enrichment at the expense of the Americans.

The American president is trying to improve his reputation among American high-tech companies, where he was criticized for unleashing a "trade war" with China. Their branches and production facilities are located there, and the increase in duties on Chinese products caused inconvenience. Even some iPhone components are made in China. It is profitable for the Americans to locate production in Chinese free economic zones, use cheap labor and thereby reduce production costs, although for permission to work in the PRC they have to share trade secrets and know-how.

Apple of discord

The prerequisite for the smuggling and illegal resale of Apple products was the marketing policy of Apple. In the late 1990s, the now deceased co-founder of the company, Steve Jobs, decided to move away from cooperation with retail chains and independently take up the sale of manufactured products in the United States. To develop a marketing strategy and concept for branded Apple Stores, Jobs hired renowned "salespeople" - ex-chairman of GAP clothing chain Millard Drexler, vice chairman of commerce for Target retail chain Ron Johnson. This decision brought the development of a computer manufacturer to a qualitatively new level. Over the past 13 years, Apple's revenue has grown from $ 16 billion to nearly $ 268 billion a year.

The downside of success was the emergence of a gray market for Apple products, because in the US new devices appear on the shelves several months earlier than in other countries, and are much cheaper in branded stores than in retail chains. As a rule, foreign citizens buy goods in the Apple Store during a trip to the United States or other countries, and then import them into their countries without paying VAT for subsequent resale with a markup of up to $ 100. It turns out a little more expensive than in a company store, but cheaper than retail chains that have a partnership agreement with Apple. Often these phones and computers end up on the shelves of small mobile technology stores. So about 20% of the iPhones released worldwide are resold.

Related: Apple to update Siri, to add Ukrainian language to its list

This practice is common in Russia, where there is no Apple Store. In 2013, the Russians turned to local online stores with a request to sell them for any money a fresh iPhone 5S at that time, which had not yet gone on sale in Russian cities. Smartphones purchased in Germany for about 900 euros were bought in stores for 1.6 thousand euros. Despite the fact that Apple opened its Apple Rus company in the Russian Federation in 2012, an online store in 2013 and switched to independent sales, the gray market continues to exist amid crisis in the economy. Due to inflation in Russia, prices for Apple products have increased, they are pegged to the dollar exchange rate.

Unofficially imported devices and accessories from abroad can be bought cheaper than from the official representatives of the manufacturer, because in case of contraband 20% VAT is not paid on the value of the goods. In the US, iPhone 12 is 20% cheaper than in Russia. The share of illegally imported smartphones in Russia is up to 13%.

The Soviet legacy left its mark. In the USSR, speculation and scarce goods flourished, ranging from electronics, branded clothing and perfumes, to delicacies and alcohol, which were imported for resale by sailors, international drivers, diplomats, commercial pilots and representatives of other professions who often traveled abroad for work. This is not the first major scandal in which Aeroflot has been involved. In 1996-1999, $ 252 million were illegally transferred from the airline's accounts to the accounts of the Swiss company Andava, which shareholders were former Aeroflot executives and businessman Boris Berezovsky.

The gray market for Apple products is thriving in China, despite having 50 branded stores. The market capacity is so great that Americans cannot close sales on themselves. In 2011, the Chinese city of Kunming became famous for finding illegal Apple Stores of local entrepreneurs who managed to copy their design and service features. In 2014, Chinese resellers imported iPhone 6s from overseas Apple Stores and sold them at a price of $ 2,000 (a month before the model appeared on the Chinese market). In 2018, Chinese law enforcement officials exposed 26 smugglers who used drones to transport iPhones from Hong Kong to Shenzhen to avoid paying duties. The scheme made it possible to transfer up to 15 thousand phones in one night. The Hong Kong Special Administrative Region is a free port, and there are no tariffs, rates and quotas, VAT or other taxes on the import and export of goods. But when goods are imported into mainland China, duties are levied.

The gray market for "apple" products exists in India, where in terms of sales of smartphones Apple is inferior to the Korean Samsung and Chinese manufacturers. In 2018, it was cheaper for Indian citizens to buy an iPhone X in Dubai (UAE) with a two-way ticket than in their own country for $ 1.6 thousand. To combat the gray market, Apple introduced a restriction on selling to one person no more than two copies of the same goods. The Americans had to raise prices for smartphones iPhone 8, iPhone 8 Plus, iPhone X in order to reduce the opportunity for resellers to earn on the margin.

Ukraine has not gone far from Russia and China. Despite the fact that Apple authorized resellers operate in Ukrainian cities, the gray market share of products was 60-70% in 2018. In December last year, a Ukrainian was detained at Boryspil airport who tried to illegally import 26 iPhone 11 Pro smartphones from Dubai and hid them in his pants. Apparently in order to restore order in the market and take control of sales, Apple has strengthened its presence in Ukraine in recent years. In 2018-2019, Apple Shop stores were opened in Odesa and Kyiv - outlets in retail chains with the participation of an American company. In April 2020, Apple opened its Apple Ukraine branch in Kyiv.

Related: European Commission preparing legal action against Apple

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