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Bear market blues: with diplomatic tensions running high between Russia and the U.S., will Hollywood pay the price?

Events in Ukraine have set diplomatic relations between the U.S. and Russia on edge, but also at potential risk is one of America's top exports: Hollywood movies.

Russia is the ninth-biggest box office territory in the world, with a gross of $1.24 billion last year--and U.S. films took a whopping 75% share of that total. Plus, the Russian market is still growing, unlike the other major European markets.

But in recent months, legislation from politicians linked to Russian President Vladimir Putin has been proposed that, if acted upon, could harm Hollywood's business.

In late March, Robert Schlegel, a deputy for Putin's United Russia party, said he was drafting a measure that would introduce a 50% cap on the number of foreign films shown in Russian cinemas. Prime Minister Dmitry Medvedev also proposed a tax be levied on the release of foreign films, and called for a duty to be imposed on some movie imports.

The danger is that the establishment of tougher economic sanctions by the U.S. against Russia over its annexation of Crimea, a Ukrainian peninsula, could tempt Putin to punish U.S. interests in Russia--and Hollywood might prove an easy target for reprisals.

However, many in the Russian industry have pointed out that restricting access to Hollywood movies would be counterproductive. The move would fuel piracy, and could adversely affect local production services.

"The infrastructure that is being developed in Russia is there for all films, and if the commercial incentives to develop cease, that would be a loss also for the Russian industry, because they need that infrastructure," says Chris Marcich, the Motion Picture Assn, of America's chief in Europe, Middle East and Africa.

Moreover, Hollywood studios release Russian movies within the territory, as well as distributing their own films there.

"I am sure that the American majors would not be interested in any weakening of the relationship," Ilya Bachurin, chief exec at Russian film studio Glavkino, says. "Only political motivations could be the reason for this. I hope that common sense will prevail."

Indeed, most observers downplay the risks of U.S. sanctions on the entertainment industry.

American Paul Heth, CEO of the top theater chain in Russia, Karo Film, which recently announced a $150 million expansion program, is hopeful that the international situation will have no harmful effects. "While there have been talks for a number of years in the Duma about various measures to further support the growth and development of Russian film," Heth says, "I do not see a scenario where a draconian change will be made that would hurt the overall cinema industry."

However, the Ukraine crisis already has hit the Russian biz. Ukrainian releases of some Russian films, such as Alexey Uchitel's "Break Loose," have been scrapped. But Uchitel, who heads Rock Films, one of the few Russian production companies that develops projects with international partners on a regular basis, remains positive.

"We speak the universal language of film," he says, "and we look at each other's filmographies and professional reputation rather than react to news headlines."

Russia is the ninth-biggest territory in the world in film box office.

Hollywood Eclipse

The U.S. majors have substantial interests in the Russian market

$1.24b Russian box office gross for 2013

75% U.S. films
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Title Annotation:GLOBAL
Author:Barraclough, Leo
Geographic Code:4EXRU
Date:Apr 29, 2014
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