IFTA Examines Russia's Marketplace

A combination of falling oil prices and international sanctions pushed Russia into a deep recession in 2015, with the GDP falling by close to 4%. The downturn continued through 2016. The recovery of oil prices in the latter half of 2016 has helped the ruble to appreciate. In the entertainment sector, the economic slowdown caused many distributors to nearly halt foreign acquisitions. Despite the recent strengthening of the ruble, companies remain cautious of signing contracts in USD. The previously challenging territory has become even more difficult to close a deal for imported independent programming.

The 2016 box office for the Commonwealth of Independent States (CIS) region (Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Uzbekistan), totaled US$778.24 million. When compared to 2015 results, the year was down 1.3% in U.S. dollars but rose 7.6% in the local currency as a result of currency fluctuations. The economic uncertainty caused distributors to be selective in their acquisitions, leaning heavily on commercial titles and taking less risk with arthouse films.

Some industry locals have suggested that the economic crisis plays into the hands of the Hollywood major studios. With less money to spend, local distributors chose high budget U.S. blockbusters over smaller U.S. films and Russian films. Local titles accounted for just 9.1% of the box office in 2016.

The government has increased its involvement in the entertainment industry across all sectors in order to support local businesses. On the theatrical side, agreements were made with several exhibitors to dedicate 20% of screens to Russian films. Unofficial blackout dates keep foreign blockbuster titles from competing with high budget local films. A proposed increase of the distribution certificate fee to US$88,420 per film (up from US$53) would nearly end all foreign independent theatrical releases.

In the television sector, foreign ownership of media companies was capped at 20%, causing a number of foreign TV companies to leave the territory or sell off much of their local holdings. Advertising has been barred on Pay TV channels, disrupting the budgets of many Pay networks. Similar to the media ownership law, a new regulation caps foreign ownership of VOD services at 20%. The law only applies to platforms with more than 50% of its users located in Russia, exempting global players such as Netflix and Amazon.

The television market is extremely saturated with more than 2,300 channels in operation in 2016. Many channels are beginning to offer more catch-up or live online streaming. Over half of all Free TV channels and just over a quarter of Pay TV channels do so. Programming acquired for television in Russia is very much dominated by deals with the major studios. It is even more difficult for an independent to sell to TV than theatrical. Most independent films that make it to television had a strong local theatrical release.

Piracy remains a major issue across all sectors of the entertainment industry, particularly the emerging VOD business. The online video market has not been as successful as previously projected, with revenues now set to hit US$107 million in 2017. The struggles of the VOD sector have caused most local platforms to offer hybrid services, relying on mixture of subscriptions, advertising and rental or purchase transactions. EST and TVOD are the most profitable segments of the online market. SVOD is the fastest growing segment but is still behind in revenue.

Russia has lost significant value as a sales territory since the start of the ruble devaluation. Today’s MGs for an all rights deal have dropped significantly. While the ruble has recently become more stable, buyers remain cautious. Should the proposed increase to the distribution certificate fee pass, nearly all theatrical exhibition would end for imported independent titles. Television deals are still possible but many broadcasters are facing budget cuts and must adhere to output deals with major U.S. studios. The VOD market continues to struggle to develop with the popularity and accessibility of pirated content. Unfortunately, officials do little to enforce the anti-piracy laws.