The new cove for digital piracy: Ukraine

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By Michael Learmonth

(IDG) -- Fight your way through the early April bustle of Kiev's outdoor markets and you'll come across all sorts of local treats. There are pickled cucumbers, warm Easter breads and fresh hot copies of Windows 2000. Everywhere you look, young guys in leather jackets hawk Madonna's Music from portable tables. Pensioners sell CDs stacked on wooden dowels like digital shish kebabs.

On the streets of Kiev, there seem to be more compact discs for sale than vegetables. They're the fruit of one of Ukraine's fastest-growing and most profitable industry: digital piracy.

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Ukraine has become the most troublesome source of pirated intellectual property in the world, according to a recent report from the United States Trade Representative, beating out former top pirates China, Paraguay and the Russian Federation. Though China pumps out more discs, the Ukrainian government's intransigence on the issue catapulted the country to the top of the list. Last year, Ukrainian CD manufacturing plants exported an estimated 40 million CDs.

At the same time, seizures of these pirate CDs have also been on the rise. In January, 110,000 discs were confiscated in Bulgaria and 400,000 were taken in Frankfurt, Germany.

All told, Ukrainian piracy costs the recording industry $200 million a year, according to the International Federation of Phonographic Industries, part of the $20 billion a year that copyright piracy costs the U.S. software, film and music industries. Companies like Microsoft and Vivendi Universal believe that stemming Ukraine's illegal exports is vital to reducing global copyright piracy.

But by designating Ukraine a "priority foreign country," the U.S. Trade Representative is not only targeting digital pirates. Under U.S. trade rules, it is also obligated to impose tough trade sanctions on other Ukrainian export staples such as textiles, steel and chemicals.

The threat of blanket sanctions has touched off a volatile national debate in Ukraine. The CD manufacturers argue that American industry is more interested in stifling competition than protecting copyright, and they paint themselves as Robin Hood figures, protecting the poor Ukrainian consumer against high prices set by the Microsoft monopoly and a music industry that's being investigated on two continents for price-fixing.

"We are potential competitors," says Igor Eichenwald, head of operations at Kiev's Bolidisc CD plant. "That is what the Americans are afraid of."

This might not be the most nuanced retort to intellectual property law, but it has hit a nationalist nerve in a country struggling to regain the global prestige it lost when it broke away from the former Soviet Union. The threat of sanctions is also worrying U.S. diplomats who have worked hard over the past decade to cultivate this pivotal Eastern European "swing" state. The trade dispute could permanently damage U.S.-Ukraine relations, officials at the U.S. embassy in Kiev fear.

Yet despite the CD producers' attempts to tap into national pride, there is nothing particularly Ukrainian about its piracy industry. It is in fact a castoff from neighboring Bulgaria. In 1995, under pressure from the United States, the Bulgarian government made copyright theft a criminal offense and adopted the Geneva Phonograms Convention, which gave U.S. copyright holders protection in Bulgaria.

Bulgarian CD producers wasted little time relocating to Ukraine, where copyright theft was a misdemeanor and foreign copyrights had no protection under Ukrainian law. By 1998, customs agents around the world began intercepting huge pirate shipments that were ultimately traced to plants in Ukraine.

Last June, President Clinton met with Ukrainian President Leonid Kuchma to sign the Joint Action Plan to Combat Optical Media Piracy. The Clinton agreement called for changes to Ukrainian law that would bring stiffer penalties and jail sentences for copyright violators, as well as the closing of all pirate CD plants.

In early April, President Kuchma followed through, signing a law that makes copyright theft a criminal act. But the loopholes are gaping: Under the law, only the person who orders the pirated copy is liable, not the entity responsible for its production. This way, Ukrainian CD plants are free to skirt the rules by setting up paper companies around the world that fax in their "orders" for pirated CDs.

And since Clinton's visit, the Kuchma administration has been weakened by scandal. In November, a prominent journalist and critic of the government was murdered, and secret tapes made by an aide to Kuchma allegedly link the president to the killing. Kuchma says the tapes were doctored and denies any involvement. While the government struggles to stay in power, few officials have the stomach to confront the CD manufacturers on an issue pirates portray as a matter of national pride.

"The pirates are very active in the parliament when they are trying to postpone drafts of new legislation," says Eugene Korniychuk, a lawyer and former adviser to Kuchma on copyright issues. "They complain they are Ukrainian companies that pay taxes and have employees that they will have to fire."

Nevertheless, Mykola Paladiy, chairman of the newly established State Department of Intellectual Property, claims Ukrainian customs agents are winning the war against piracy. He estimates only 2.5 million pirate CDs were smuggled from Ukraine last year - far fewer than the 40 million claimed by the United States.

Paladiy says a new bill has been submitted to President Kuchma that will allow five-year jail sentences for copyright violators. And he expects his government to pass all aspects of the Clinton agreement by June - except for one glaring omission. While the Clinton accord expressly demands that the pirate CD plants be closed down, Paladiy says his government need not close down the plants as long as they agree to "open their doors for inspection any time, day or night."

This is unlikely to satisfy U.S. trade officials, who say the plants are tipped off in advance and illicit product is long gone by the time inspectors show up.

But perhaps more daunting for the major corporations is a culture that has long embraced piracy. During the Soviet era, people who wanted Western music had to buy it from street vendors. Today, the vendors even hawk pirate CDs in front of the State Copyright Agency.

"Under the communist regime everything was for the community," says Andrey Dakhovskyy, owner of Ukrainian Records, a Kiev-based distributor. "For 70 years there was no respect for intellectual property. People don't understand what it is. It's like trying to sell air."

That's not a particularly encouraging philosophy for a Western recording industry anxious to incubate a legitimate market in Ukraine before improved telecommunications infrastructure enables a new generation of digital downloaders.

As owner of Ukrainian Records, Dakhovskyy is the exclusive distributor for Universal Records in Ukraine.

Right now Universal licenses Dakhovskyy to distribute only cassettes, which can't be copied en masse like digital CDs can. As an experiment, Dakhovskyy released a CD of Woman, the compilation featuring Shania Twain, Melanie C and Cher. Dakhovskyy priced the CD to compete with the pirates at 12 hryvnia (about $2). Within days there were several pirate copies of Woman on the street available for 11 hryvnia, some shelved next to the legitimate version in stores.

The pirate disc brings much more profit, even at 11 hryvnia, because local manufacturers don't pay royalties. Those cost 75 cents per disc for Russian and Ukrainian rights.

"I can't blame the consumer if they see something cheaper on the street," Dakhovskyy says. "How could I ask them to buy my legitimate product when the pirate is cheaper?"

Microsoft leads anti-piracy sweep
April 2, 2001
Movie piracy thrives on the Net
March 1, 2001
German CD makers push anti-piracy system
February 12, 2001
Software piracy Microsoft's big threat
February 7, 2001
BSA calls truce with software pirates
January 31, 2001

EU parliament ok's law curbing Net piracy
(The Industry Standard)
Piracy crackdown in Asia helps Microsoft, others
(IDG.net)
Microsoft launches worldwide piracy hunt
(IDG.net)
BSA seeks to block alleged software pirates
(Computerworld)
China makes move against software piracy
(IDG.net)
Suit alleges pirates are using auction sites
(IDG.net)
E-book publishers face piracy panic
(The Industry Standard)
Criminal action against state piracy in Argentina
(IDG.net)

Microsoft
Vivendi

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