Moscow Office Taps Opportunity In Russia's Telecom And Media Markets

Thursday, September 1, 2011 - 01:00

The Editor interviews Alla Y. Naglis , Partner, King & Spalding LLP.

Editor: Please tell us about your background and experience. We understand you are consistently ranked as one of Russia's leading technology, media and telecommunications (TMT) lawyers.

Naglis: After graduating from law school in 1997, I joined the Moscow office of Patterson Belknap Webb & Tyler LLP, focusing on cross-border deals. One of my first clients was a major U.S. telecom infrastructure equipment supplier that worked with Russian telephony service providers. After Russia's financial crisis of 1998, the firm closed its Moscow office, and our team of lawyers moved to then Hogan & Hartson, where, in addition to M&A and cross-border transactions, I started developing the TMT practice. Fourteen years ago, there was hardly any interest in Russian media markets. Telecom was there but not very well developed, and there was little U.S. interest in media or media entertainment markets. During the last six years, TMT practice - with a bigger "M" probably - has been growing, and my practice has primarily focused on advising media entertainment companies in the film and television industries. I cover all areas of their Russian operations, including contractual, corporate, regulatory and IP Protection.Finally, in May of this year, I joined King & Spalding.

Editor: Please discuss the recent opening of King & Spalding's Moscow office.

Naglis: Opened in May 2011, the Moscow office serves the firm's international clients in Russia and develops local business. Russia is a big market with great potential for local clients seeking to expand internationally and for international clients to expand into Russia. Although we do not have CIS-qualified lawyers, there are many transactions that involve Russia and other former Soviet Union jurisdictions, and these are covered by the Moscow office with support from local contacts.

Editor: Please discuss Federal Law No. 142-FZ amending Russia's Mass Media Law.

Naglis: Originally adopted in 1991, the Mass Media Law (the Law) was revised many times, with recent June amendments scheduled to take effect in November. The old version of the Law focused primarily on print media and to a lesser extent on television (and in the latter case, effectively only free-to-air broadcasting); however, Russia never had dedicated regulations for television.

Certainly, 20 years ago, the Law did not contemplate the myriad technologies and means of distribution that have emerged in the market, and regulations that did exist for television were ancillary, inconsistent and sometimes contradictory. The very notion of cable television was absent from the federal legislation until 2006, so there have been - and still are - many gaps to fill in.

For the first time in Russian regulation, the amendments create a clear definition of a TV channel and focus not only on television and radio but also on web media. After much debate and controversy in advance of their adoption, the final amendments incorporate only registered web media - and registration is optional. Such an arrangement allayed market concerns about overly restricting web media; thus, for example, social media will be covered by the Law only via voluntary registration, which has certain privileges but also many obligations.

Regarding television and radio, there are new rules expanding and clarifying licensing procedures, and the amendments quashed longstanding hopes that foreign channels might be allowed to broadcast in Russia without local licensing. While the European Convention on Transfrontier Television offered some hope that mandatory local licensing would be abolished, it was never ratified in Russia. As it stands, foreign channels have to set up local corporate presence, and the Law imposes foreign ownership restrictions on obtaining mass media registration and the license to broadcast within the Russian Federation.

Editor: How will 142-FZ amendments treat critical terms, such as "mass media" and "media product"?

Naglis: While these terms already existed in the industry, the amendments add the concept of web media. There will be further changes in the law, including to the Civil Code of the Russian Federation, which will define some aspects of the"media product" concept, particularly on the social media side; however, it is not per se the focus of the current amendments. The Law maintains the old concept of media - applying mostly to "traditional media" but also now including web media to the extent they are considered mass media - and the amendments seek to bring old regulations closer to the new market reality.

Editor: How do 142-FZ licensing amendments affect domestic and foreign corporations in their media operations within Russia?

Naglis: There are restrictions that limit foreign corporate participation in mass media activities and broadcasting. Before these amendments, the restrictions applied only to television, but now they cover radio as well. The law now defines "broadcaster" explicitly as a Russian entity that forms television or radio channel content and holds the Russian license. The expectation is that foreign channels may operate in Russia if there is at least some localization - corporate localization for certain and content localization ideally.

The licensing amendments also create the option for a universal license, which replaces an awkward and cumbersome old system of licensing that required individual applications for each type of broadcasting - free-to-air and cable. To qualify for a universal license, you must be a Russian broadcaster. Foreign companies can invest, but the majority ownership and editorial control must remain with the Russian company. Our attorneys have been helping international clients to set up structures that comply with local requirements.

Editor: Is Russia experiencing a consolidation of the telecommunications industry?

Naglis: The consolidation market is very active. At the national level, there are four principal Russian telecom players (the big four), which all started with telephony. The current trend is toward not only consolidating fixed and mobile telephony - each player has been acquiring local providers all over Russia - but also expanding their platforms to offer wireless Internet and cable services. It is a consolidation of the initial services level - regionally and internationally - and an extension of the platform to these mobile devices.

Another interesting market development is that the big four have recently formed a "union" to develop a Long Term Evolution (LTE) network, often marketed as "4G," for mobile telecommunications, Russia-wide. The difficulty is that half of the available frequencies historically were reserved for military purposes, and the other half already are allocated. As a result, the big four formed an understanding that the bandwidth of frequencies available for the LTE network could accommodate - not surprisingly - only four players. They will make suggestions to the government as to the reallocation of unused military frequencies.

Further, the big four have reached an agreement with the most active Russian wireless Internet provider, the only one at the moment with facilities suitable for building an LTE network. This agreement may trigger corporate development because of the expectation that the big four may buy out the wireless network operator in 2014.

Editor: Have any antitrust issues been raised with respect to the big four players and reallocation of those military frequencies?

Naglis: Definitely. The telecommunications market is generally consolidated, and its strategic importance for the national economy inevitably triggers antitrust concerns. I anticipate a potential competition component there, but it remains unclear how the frequency reallocations will be handled.

Editor: Please discuss the status of Internet and intellectual property protection in Russia.

Naglis: It may surprise you to know that the very first references to IP protection in the Internet, specifically limited to trademarks, appeared in Russian law in 2002 and, further, that the first federal law treatment of Internet use of copyrightable works occurred in 2008. Clearly, this is an emerging area in the law, and Russia has fallen behind the U.S. and European markets. Five or six years ago, there still were major conflicts regarding trademarks and domain names - a big problem in Russia. Fortunately, the IP practice has since developed and resolved many issues.

The regulations and case law are fairly clear that the party holding a trademark in Russia has the prevailing right to use it on the Internet, including for domain names. There are many cases upholding this position; thus, Russian courts are successfully implementing the basic principles, with greater protection to the holder of the registered trademark that now extends onto the Internet.

That said, a tricky issue may arise if a party, in good faith, sets up a domain name that is similar to the existing trademark. If the party's website, for example, refers to different services or a completely separate market area, then it would not necessarily be a conflict. Still, the holder of the registered trademark likely would be given more beneficial treatment, even though the law allows for different outcomes.

With respect to copyrights, Russia is still a difficult market. Piracy is a problem for copyright holders, even though regulations are clear in their support. There is debate about the concept of free licensing - like that offered by Creative Commons1- which is being developed as the replacement to the seal code. Some market players, particularly in the film and music industries, are concerned that Creative Commons licensing in Russia will cause more harm than good. They cite poor implementation tools that could lead to bad-faith parties falsely claiming coverage by authorized use protections. As it stands, the amendments are not yet in their final form, so the situation is still developing.

Editor: Please discuss the advent of social media from your perspective. Given the wide disparity of privacy laws, where does Russia fit into the global spectrum?

Naglis: Russia's Data Protection Law (DPL) - including amendments in force as of July 1, 2011 - follows the European model. It mandates notice to the data subject about any processing of personal data and its specific purpose. No data can be used or processed other than for the declared purpose and scope. The DPL requires informed consent of the data subject, and there are special security requirements for data processing and the prevention of unauthorized disclosure.

With certain restrictions, the data subject must have access to data, and recent amendments provide the right to revoke consent for personal data processing at any time. Likely implications of the amendments include government revision of security rules and additional certification requirements for personal data processing.

While the DPL applies to all areas, such as banking, social media seems to be the subject of greatest debate and uncertainty. There were some recent data breaches when personal data leaked into the Internet and web search engines, including private SMS (text messages). These acute developments added to the debate about implementation of the new amendments.

Editor: What are the key areas of opportunity for U.S. companies interested in doing business in Russia?

Naglis: Russia is a big market, and our natural resources remain the primary draw for foreign companies. Telecommunication and media are emerging areas with enormous potential but also many challenges, including unequal distribution of resources and population. Businesses entering Russia should be prepared for an uneven regulatory environment, with some areas highly controlled and others receiving inconsistent or even no regulation. Thus, the Law is left to the discretion of regulators. Very few foreign companies, if any, manage to enter this unpredictable market without some local support, not necessarily an equal Russian partner, but one that offers a local team that understands and can navigate the environment.

This is exactly our focus with King & Spalding clients. We advise clients - both those coming into Russia and those starting from Russia and wishing to expand - on doing business in an environment that is not customary for them. In this arena, King & Spalding Moscow offers expertise and deep commitment.

Please email the interviewee at anaglis@kslaw.com with questions about this interview.