One of the strongest global trends of the past years is digitalization and transparency in supply chains and management, including state control and regulation. In Russia, these trends have surfaced in a number of areas, including a system of national traceability of goods. Implementation of this system has a huge impact on any supplier to the Russian market and all in-country manufactures and retailers.
Beginning in the early 90’s, the problem of counterfeit goods and illegal trade in the Russian consumer market has been significant and undisputable. Consumers, companies, and state interests have suffered from the low protection from criminal activity. The share of illicit trading in the consumer goods industry can be up to 35%, in the perfumery market 20%, in the drug market up to 10%, and for mineral water up to 60%.
According to a study by the analytical agency Kantar TNS, in the first quarter of 2018 the share of the illegal cigarette market in Russia increased to 7.7% from 4.6% a year earlier.
To solve this issue, the government, along with the assistance of private partners, developed a powerful tool for confirming the authenticity of goods and analyzing trade activity based on digitalization development – a digital labeling and traceability system.
As this solution covers different business areas and interests not only domestic manufacturers, importers, and distributers, but also their partners outside Russia, there are many misunderstandings, even in basic definitions. To understand what effects the implementation of the labeling system will have, we first should identify what is considered illegal trade and, thus, what the government is fighting. Illegal trade falls into one of four categories:
- Parallel import –the import of goods with a trademark, but without authorization of the copyright holder
- Counterfeit products – products manufactured with unauthorized (fake) trademark placement on it
- Falsified products – goods with incomplete or unreliable information about their composition, characteristics, or properties in order to mislead consumers
- Smuggling - the importation of goods without customs clearance or the importation of prohibited goods
At the end of 2017, the President of Russia signed a government decision on the creation of a national digital labeling system based on the Center for the Development of Advanced Technologies (CRPT) by 2024.
CRPT is a public private partnership of USM, Rostec State Corporation, and A. Galitsky's Elvis-Plus Group. The system created by the CRPT, called Chestny Znak, should effectively deal with counterfeiting and smuggling and protect legal businesses, the brands of bona fide manufacturers, and consumers.
This system operates with Data Matrix code, described under GS standard in the GS1 system, unique to each good. All goods also should be described in the National Catalogue of Goods . Chestny ZNAK allows tracing labeled goods from the moment they are manufactured or imported to Russia until the end consumer buys them in a store (fig.1).
The system will have exact information about the logistics and pricing of all goods, which means a guarantee of purchasing only legal goods, a reduction of the share of falsified and counterfeit products for customers, a fair competitive environment, brand protection, an increase in market transparency for companies, and improved monitoring efficiency.
Figure 1 Chestny ZNAK track and trace system
While the new system means an improvement in tax collection and customs payment for the government, it also means that in case of a data protection failure some market participants will obtain a competitive advantage because of access to commercial secrets and customer behavior.
The general description of the whole process with DataMatrix Code is as follows:
First, a manufacturer assigns a digital code/DataMatrix code to the goods. The CRPT assigns a unique code to each product, and then the manufacturer or importer applies the code to the product package. Then, the entire goods journey is recorded at each change of ownership and separately checked at customs. The track and trace system records the transfer of goods along the entire logistics chain, including when the code is checked at the store when goods are placed on the shelf, which eliminates the possibility of introducing counterfeit goods. When the goods are sold via the online cash register, the system prevents counterfeit goods from being sold by comparing it with the database. In case the code was sold somewhere else, the track and trace system should notify you, or in the future, tax authorities.
In accordance with current regulations, the following groups will fall under the new labeling requirements in the nearest future:
- Photo cameras and flashbulbs
- Light industry
As a general rule, the introduction of digital marking comes in a few stages. For example, the footwear stages are as follows:
Figure 2 Stages of induction of footwear
Despite the lofty goals and state support for the ongoing project, there are still a lot of technical challenges and undecided issues: cryptography in code, unavailability of code for purchase from abroad, obligation of labeling prior crossing the Russian border, but not later than filling an import declaration to the customs, and the non-transparency of the working groups who develop the labeling rules and standards for each commodity group.
The list of the goods is not set and could be rapidly spread to other commodity groups, so any participant of the supply chains to or from Russia should proceed carefully and stay abreast of this developing situation.
And the main question on everyone’s mind: will this smart digital labeling bring the Russian market, and then possibly the EAEU market, to total transparency or will it negatively affect the competitive atmosphere and damage final customers.
Import Business Development Manager
+7 / 495 / 956 55 57