Mikhalkov abandoned sinking RAO ship 

 Mikhalkov abandoned sinking RAO ship

After searches in the Russian Authors’ Society (RAO) and arrest of its General Director Sergey Fedotov, Nikita Mikhalkov said that he “has nothing to do” with the RAO. However, the facts suggest otherwise.

Highly publicized checks in the non-governmental organization “Russian Authors’ Society” (RAO) and arrest of its General Director Sergey Fedotov in the end of June 2016 cast a shadow on Nikita Mikhalkov, Chairman of the Board of the Russian Union of Right-holders (RUR). The master of the Russian cinema, said that he “has nothing to do” with the RAO. CrimeRussia has put together facts that contradict this statement.

Pneumonia or trick?

Searches in the RAO and a legal action against its General Director Sergey Fedotov occurred simultaneously with the 38th Moscow International Film Festival (MIFF); Nikita Mikhalkov has been its President for 17 years straight. For all these years, starting from 1999, Mikhalkov was always standing in the white tent and greeting guests at the festival opening ceremony. 

This year, Nikita Sergeevich did not appear at the ceremony for the first time in 17 years, which seemed strange to the guests, while journalists began searching for reasons behind this mysterious absence. 

Taking the recent events in the RAO, rumors started circulating that Mikhalkov decided to sit tight until the issues of his partner and friend Sergey Fedotov resolve – i.e. stay in shadow for some time. Media published a comment from an anonymous source close to the festival who implied that Mikhalkov has ‘skipped’ the ceremony for the first time in many years due to the troubles with his old partner, comrade, and friend – businessman Sergey Fedotov: arrest, accusations of fraud, criminal case, detention. Some experts even suggested that Mikhalkov could be abroad. 

Meanwhile, Evgenia Dorofeeva, press-secretary of the Russian producer, has officially announced that the President of the MIFF was hospitalized with pneumonia; therefore, his participation in the festival is doubtful. Still, Nikita Mikhalkov appeared on the festival twice. And both appearances were related to twists in the case of Sergey Fedotov. It looked like Nikita Sergeevich tried to quash rumors of his fake pneumonia and escape abroad. 

His first surprise appearance on the festival was on June 28, 2016. In the morning it became known that the General Director of RAO has been detained on suspicion of fraud. That evening Nikita Mikhalkov, who had skipped the ceremonial festival opening, suddenly arrived to Oktyabr Cinema on a pretty insignificant occasion – to present a documentary not even included into the festival program: “Magnitsky Act. Behind the Scenes”. The president of the festival explained his personal appearance as follows: “Making such a film is a real deed, and I respect real masculine deeds. Therefore, today I specifically arrived from hospital to present this picture,” – TASS reports.

Next time Nikita Sergeevich appeared on June 30, 2016 – on the closing ceremony of the Moscow International Film Festival. Journalists did not know whether Mikhalkov would honor the closing ceremony with his presence up until last minute. However, it became known that morning that the investigation has charged Sergey Fedotov with fraud of 500 million rubles, and the General Director of RAO was put to a pre-trial detention facility. 

Later this day, Mikhalkov’s press-service announced his statement, in which the MIFF President and RUR Chairman of the Board, in his usual noble manner, expressed willingness to petition for mitigation of pre-trial restrictions imposed on Fedotov: “Sergey Sergeevich Fedotov himself is first and foremost interested to dot all "i's" and make the truth triumph”. Not only did Nikita Mikhalkov stand up for his comrade, but also spoke for the fragile copyright protection system: according to him, the investigation must be “calm, professional, and objective – to prevent some adventurous persons from exploiting this situation and, in the heat of the moment, attempting to capture or destroy the fragile, created for so long, copyright protection scheme’.

According to Mikhalkov he has no deal with the RAO
According to Mikhalkov he has no deal with the RAO Photo: Interfax
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The master also spoke of himself, thus, responding to numerous media publications mentioning his name in relation to the RAO: “Much to my regret, I can’t comment on the situation with the RAO because it’s difficult to make comments about an organization where I never worked and, in fact, have nothing to do with”.

Later, in his interview to Lenta.ru, Mikhalkov explained: “I never worked in the RAO, therefore, have no knowledge of their ‘internal affairs’. In other words, me and financial, economic, or any other interior activities of the RAO – are two parallel stories. Furthermore, the RAO as an organization and RAO in the person of Sergey Fedotov are two totally different entities (concepts) for me. Therefore, I can speak only on my experience of communication with Sergey Fedotov”.

While the true reasons behind Mikhalkov’s absence at the opening ceremony of the 38th MIFF and his sudden festival appearances on June 28 and June 30 are unknown, the producer’s statements that he “has nothing to do” with the RAO and has purely personal, not professional, relations with Fedotov, cause serious doubts. In such situations Stanislavski was saying: “I don’t believe!”

The President of the MIFF and Sergey Fedotov have very close, almost family, relations: Nikita Mikhalkov is a godfather of Fedotov’s son. Family affairs do not prevent them from running joint business projects. For example, “TRITE Workshop of Nikita Mikhalkov” and Sergey Fedotov are investors of The Hollywood Reporter – Russian Edition magazine published since March 2012. In 2007 the partners launched Billboard magazine. It was not a coincidence that Mikhalkov had spoken for the “fragile copyright protection system”: the current Russian copyright system, which attracts criticism even from those whose rights it protects (i.e. right-holders and authors), was created jointly by Mikhalkov and Fedotov.

Founders of The Hollywood Reporter Magazine Nikita Mikhalkov and Sergey Fedotov
Подпись к фото Photo: thr.ru 
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Mikhalkov tax

In fairness it must be said that Nikita Sergeevich was formally correct when said that he “has nothing to do” with the RAO. Officially he is not related to the RAO. However, Mikhalkov has a direct relationship to the creation of Russian copyright protection system in general. In 2009 Mikhalkov started lobbying imposing of levies on electronic equipment producers and importers, which was nicknamed ‘Mikhalkov tax’ or ‘blank disc tax’. The idea was to impose a 1% tax upon producers and importers of any equipment allowing to play or copy audio and video records. In 2009 the Filmmakers Union of the Russian Federation chaired by Mikhalkov introduced an initiative to establish a Fund for Culture Development and Fund for Cinematography Development to collect levies from companies producing equipment. 

However, this proposal came into collision with the Russian legislation: according to the Civil Code, only accredited organizations, established for the benefit of right-holders, can collect royalties. Then Nikita Mikhalkov, jointly with Sergey Fedotov, General Director of RAO, and the Russian Organization for Intellectual Property (VOIS), have established a new structure: the Russian Union of Right-holders (RUR).

In October 2010, the Russian Government passed the Statement #829 “Remuneration for free playing of phonograms and audio-video products for personal purposes”. According to the document, the RUR headed by Mikhalkov and Fedotov got authority to collect 1% royalties from sales of flash cards, computers, DVD players, mobile phones, hard drives, CDs, etc. 

The RUR has won tenders to collect royalties, passed through lawsuits with the Russian Union for Associated Rights, and started signing royalty deduction contracts with Canon, Sony, Casio, JVC, and Fujifilm. As a result, in November–December (first months of RUR operations), 38 million rubles have been collected. This is how the RUR has got 1% of the market estimated by Forbes at 300–600 billion rubles – i.e. the sum of 3–6 billion rubles. 

Of course, not all companies rushed to pay the ‘tribute’ to the newly-formed RUR, who estimated the accrued arrears at 1.3 billion rubles. In 2012, after several failed attempts to settle issues with the ‘deviationists’ peacefully, the RUR addressed the Prosecutor General’s Office with a complaint that the companies are violating the Statement #829. 12 large companies-defaulters were listed in the complaint, including Samsung, Panasonic, and Philips. 

The regulatory agency has decided that the defaulters who refuse to pay royalties to the RUR violate the copyright legislation and requested them to pay levies. 

Currently, four organizations are accredited by the Ministry of Culture to collect levies from users of music, texts, programs, etc. and distribute the funds between authors and right-holders: RAO, RUR, VOIS, and the Partnership for Protection and Management of Rights in the Sphere of Arts (UPRAVIS). 

Managers of the three such organizations – RAO, RUR, and VOIS – are closely connected with friendship and family links. Sergey Fedotov became the head of RAO in 2007. In 2008 he initiated creation of the VOIS, and Andrey Krichevsky, Principal General of Melodia Federal State Unitary Enterprise, became its chairman. In 2009, the RAO, headed by Fedotov, becomes a co-founder of the Mikhalkov’s RUR, while Fedotov becomes the Principal General of the new union. In 2015 his deputy Andrey Krichevsky becomes the Principal General of RUR instead of Fedotov. Interestingly, the RUR Board includes Leonid Vereschagin, General Director of “TRITE Workshop of Nikita Mikhalkov”, who has been working with Mikhalkov since 1988; while Artem Mikhalkov, son of Nikita Mikhalkov, is the Chairman of the Board. In addition, the RUR Board includes Maksim Dmitriev, who is also a member of the Council of VOIS. By the way, Elena Yampolskaya, Vice-President of VOIS, is Editor-in-Chief of Kultura (Culture) newspaper, which is closely related to Nikita Mikhalkov. And Alexander Sukhotin, Executive Director of RUR, is also the Principal General of Kultura Newspaper Editorial Board Joint Stock Company. 

It is obvious that not only Sergey Fedotov, but many other people closely linked with Mikhalkov have direct relation to operations of the RUR chaired by Mikhalkov. Unlike Mikhalkov, Fedotov never concealed the affiliation of Russian copyright protection organizations. Answering to Forbes why RAO, VOIS, and RUR are, in fact, managed by the same people related to each other, Sergey Fedotov fairly admitted: “I had never made a secret that my purpose is to build a national rights management system which would be: (A) manageable; (B) functional and really efficient. <…> Competition in this field kills the very idea of rights management. We endeavored to build some natural monopoly, similarly with civilized foreign countries. And in fact, it’s already built, because in reality, me and the established team of professionals manage almost all national organizations having governmental accreditation”. Apparently, one of the principal members of this professional team mentioned by Fedotov is Nikita Mikhalkov, who is currently denying any connections with the RAO. 

In fact, only three years ago, Nikita Sergeevich was standing on the stage, together with Sergey Fedotov, and announcing RAO achievements at a gala night dedicated to the 20th anniversary of the organization he “has nothing to do with”.

Nikita Mikhalkov and Sergey Fedotov at the 20th anniversary of the RAO
Подпись к фото Photo: rao.ru 
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Burnt by the Business

The last two years were uneasy both for the RAO and RUR. 

In 2015 law enforcement authorities started an audit of the Russian Authors’ Society, which resulted in the initiation of a criminal case against Sergey Fedotov on June 17, 2016. According to Denis Baluev, a lawyer for Fedotov, the reason behind the criminal case against the General Director of RAO is an “old conflict with former partners, who provided testimonies needed by the investigation back in the past year”. During the audit, the investigators found that the RAO had purchased four non-residential buildings in 2007–2011; the Society could not use those for commercial purposes, therefore, some buildings were not used at all. At the same time, according to lawyer Baluev, the RAO desperately needed funds to develop a digital royalty collection system. Therefore, the Authors’ Council of RAO has decided to transfer the buildings to a subsidiary company – “Service-Exploitation Company” (SEC) Closed Joint Stock Company. Then SEC has established several more companies, including Media Management and Musikalny Olimp (Music Olympus), and the real properties became a part of their charter capital. Then, according to the investigation, the buildings have been sold to third parties: Rosavtotrans, Sibir-Leasing, and some private person. The investigation believes that proceeds of the sale of real estate with the total area of 2 thousand square meters have never been received by the RAO.

The investigation has charged the General Director of RAO with fraud of especially large scale (part 4 of Article 159 of the Criminal Code of the Russian Federation). According to the investigators, Fedotov has transferred RAO assets worth more that 500 million rubles to a subsidiary company. Fedotov is facing up to 10 years behind bars. 

Russian producers had also indicated in the end of 2015 that financial aspects of RAO operations are not transparent. 

“The point is that a money collection system lacking an addressee and money distribution mechanism does not meet WTO requirements,” – Anton Sergo, founder of Internet & Law Project and professor of the Russian State Academy of Intellectual Property, says. – “We have undertaken obligations to abolish such a system, but it’s currently being actively used by the RAO and RUR. And now we should strengthen this system? Even if they introduce an adequate money distribution mechanism, the collection principle – when we all have to pay for pirates – still contradicts the international legislation, primarily, WTO regulations”. 

The RUR system of royalties distribution between right-holders and authors is not transparent. According to Forbes, RUR started distributing the collected royalties only in 2011, while the 38 million rubles collected in 2010 had never been distributed between right-holders. According to the RUR report, right-holders received only 290 million rubles out of the 683 million that have been collected. 179 million rubles remain unpaid for products whose right-holders are unknown or whose account details can’t be determined. The Association of Trading Companies and Manufacturers of Electrical Household and Computer Equipment (Association RATEK) has stated repeatedly that the private copying levy collection system used by RUR is not transparent, to say the least. The list of ‘taxable’ equipment also raises questions: Association RATEK notes that it includes photo cameras, which no one uses to copy copyrighted content. 

According to Forbes, RUR spends 15% of collected funds for its own needs. RUR has the right to allocate up to 20% of collected funds to support cultural projects. It is difficult to find in open sources information on remuneration and financial operations of Nikita Mikhalkov, RUR Chairman of the Board. RUR must submit financial report to the control body – the Ministry of Culture – on the annual basis, but this report provides only basic parameters without flow of funds details. 

In his speech at the closing ceremony of the 38th MIFF, neither did Nikita Mikhalkov mention the situation with RAO, nor expressed concerns with regards to RUR closely affiliated with RAO. He just said that the festival was very difficult and then noted optimistically: “The festival is alive regardless of obstacles”.

It is difficult to say how will Nikita Sergeevich meet the next, 39th MIFF. However, the market situation is not favorable to the lobby of the RUR founder. 

“During the fat years, when he [Nikita Mikhalkov] was asking for a billion, the government provided that billion and never asked what for. Now, when the government is canceling excessive taxes to help the business to survive, it would not be logical to impose a new levy on Internet-related businesses and users – and this levy might be as well spent to build new cottages for Bohemia” – journalist Anton Nosik notes.

In May 2015 the authorities did not support the idea of Mikhalkov and Konchalovsky to launch a domestic fast food network “Edim Doma” (Eating at Home). In December 2015 the Chairman of the Filmmakers Union of the Russian Federation announced that the All-Russia State Television and Radio Broadcasting Company (VGTRK) has taken off the air the final, 38th series of his “Besogon TV” program on Russia 24 Channel, which had to be aired on December 12, 2015. The producer noted that the 37 previous series caused no issues. 

In the beginning of 2016, the Russian Union of Right-holders chaired by Mikhalkov has lost a lawsuit to Dell. The RUR requested 90 million rubles in ‘blank disc tax’ for import of servers and data storage devices to Russia. But the court upheld the position of Dell in this dispute. 

Time will show whether the RUR, whose operations cause numerous questions from both right-holders and trade companies, would be searched, similarly with the allied RAO, by law enforcement, and how long will the organization chaired by Mikhalkov stay afloat.

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