Inside the Rise and Receding of Russia's Music Industry

Twenty-five years ago, construction began on the foundation of Russia's music industry. Up to that point, nothing resembling a proper music industry had formed under communist rule; music is ideology, and there was no room for competition on the other side of the Iron Curtain.

Today, as Russia's particular form of capitalism reigns, ideology has returned to the entertainment industry, and has begun to play a major role in the country's music business and culture.

BUILT FROM SCRATCH

The dubious privatization deals of the mid-'90s, such as that of metals giants Norilsk Nickel, Novolipetsk Steel Plant, or oil and gas company Surgutneftegaz, helped many of those in orbit around the Kremlin's power base accumulate significant wealth and influence in the country (as long as they behave). The music industry was spared this cronyist privatization simply because there was nothing of much interest -- value -- for the country's burgeoning oligarch class to grab.

Under communism, the country had just one record label, Melodiya, which was strictly controlled by the government, which made sure that only "safe" records and artists were released and promoted. FM radio simply didn't exist. Concerts were managed by state-run agencies, and rock musicians were mostly barred from touring. It would be charitable to characterize the last century of the Russian music industry as barebones.

That top-down, ideologically driven control of the culture industry in Russia began to change towards the end of the '80s, as the country began to open up its borders -- literally and figuratively -- in the wake of Soviet leader Mikhail Gorbachev's perestroika reforms, which looked to introduce components of democracy without shedding too much of its entrenched communist ideology.

Bands and artists -- until then relegated to underground shows in private apartments -- were eventually allowed to tour. Around the time of the country's dramatic shift, shows were normally promoted by officials of the youth communist organization, Komsomol, who had access to venues that organizers of underground shows lacked. Everything was controlled by the government, and no one from outside of Komsomol was allowed to organize events. In a miniature version of the country's privatization deals, Komsomol officials saw their access as a way to cash in, as elements of a market economy were gradually introduced.

In April 1990, the country's first privately held radio station, Europa Plus, went on the air. Around the same time, the first independent labels, such as SNC Records, were launched.

By the time of the Soviet Union's collapse in late 1991, all that remained of the state-run music industry was a few vinyl pressing plants, businesses that would imminently become obsolete as the CD rose in popularity.

Over the next two decades, a music industry was allowed to mature with little or no government involvement, eventually growing to be worth $2 billion annually by the early '10s, and which faced the same challenges as other, more mature markets, such as the continuing decline in physical sales and the question of growing streaming revenues.

The persistent issue of piracy -- which is still, 14 years after the original Napster's closure, a focus for the American industry --  was more acute in Russia than in some other markets. This was, most notably, due to VKontakte, the "Cyrillic Facebook" and Russia's largest social networking website, considered by the industry at large to be a global-scale threat.

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Over much of President Putin's rule, Russia has had differences with the West, but the relations soured precipitously last year, when the Maidan revolution in Ukraine, which toppled president Viktor Yanukovych, put Russia and the West at odds. The West welcomed what it saw as the overthrow of a corrupt regime, while Russia claimed the revolution was illegitimate and brought to power a junta. Consequently, Russia annexed the Crimean peninsular region and provided support for pro-Russian rebels in East Ukraine.

THE LIVE INDUSTRY VS. THE FALLING RUBLE

Just a few years ago, after years of maturation in the live industry, Moscow and St. Petersburg were among the regular tour dates of just about any Western artist touring Europe, while some were also able to score lucrative gigs at private and corporate parties.

But the Pussy Riot affair and the adoption of a national law "against gay propaganda among minors," widely seen as a crackdown against the LGBT community, made Western acts far less willing to come to Russia. The Black Keys and Pulp refused to tour, citing the Pussy Riot affair as the reason. Pulp gave a number of reasons, including the Pussy Riot affair. Bloc Party was discouraged by the anti-gay law. Mark Knopfler cancelled his tour because of authorities' pressure on human rights organizations. Many more didn't make public statements but quietly declined offers from Russian promoters.

The situation worsened last year, when Russia's annexation of Ukraine's Crimean Peninsula caused the biggest political standoff between Russia and the West since the end of the Cold War.

Under the burden of international sanctions slapped on Russia by the United States and the European Union, the ruble began a downward spiral in mid-2014. Over the past 12 months, the ruble has lost nearly one-half of its value, creating major difficulties for the live industry in the country.

"Elsewhere in the world, the live segment is on the rise," Eduard Ratinikov, head of the promoter company TCI, told Billboard. "But here, it is shrinking. Since the beginning of the standoff between Russia and the West, Russia's international reputation has deteriorated. We don't need to discuss who is right and who is wrong -- the situation is the way it is." According to Ratnikov, Western artists are generally unwilling to play dates in Russia because of the country's international reputation, and those who would still want to come demand fees in US dollars or Euros -- prices local promoters can't afford under a diminished ruble.

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Western artists wouldn't take a 20-40 percent cut to their fees, Mikhail Shurygin, president of NCA Group, which promotes shows and runs the Kosmonavt club in St Petersburg, tells Billboard. "For now, there is still competition between local promoters, which artists' agents take advantage of."

To generate the same amount in US dollars from ticket sales as a year ago, promoters would have to sell twice as many tickets or to double prices. "We can't double or triple ticket prices," Ratnikov said. "They remain in the range of between 2,000 rubles [$29] and 6,000 rubles [$88]."

According to Shurygin, ticket prices have gone up by 10 or 20 percent, which is about as much as the market can bear -- any further hikes would divert audiences from shows by foreign artists to local acts.

Shurygin says the changes challenges may make the industry healthier in the longer run. "My forecast is that by spring 2016, the live market for foreign artists will contract as the number of promoters and shows will go down," he said. "But this is an absolutely natural and normal process."

ORTHODOXY ATTACKS

Over the last few years, conservative religious groups have stepped to the fore, asserting their responsibility to defend the nation's "moral values" -- roughly, the belief that Russia is "a high-morality" country, compared with the "degenerate" West, which allows things like gay marriages -- and protesting culture that they consider to be "harmful."

Although the activists' puritanical rhetoric might be reminiscent of that from Soviet-era ideologues, today's situation is quite different. In the Soviet era, religion was suppressed and criticized just as much as "bourgeois culture," including Western rock music. In the wake of communism's collapse, however, the Orthodox Church -- separated from the state by the Russian constitution -- has been gaining influence and support in the highest echelons of power.

The Pussy Riot affair stands as the highest-profile proof of the Orthodox Church's strength. The punk band's jailing, for performing an anti-Putin "punk prayer" in Russia's main Orthodox cathedral, was strongly supported by senior church authorities, then carried out by state actors. Subsequently, conservative religious activists repeatedly protested against shows by local and Western artists who they asserted were Satanic. 

In 2014, Orthodox activists' protests resulted in cancelations and disruptions of shows during Cannibal Corpse's Russian tour -- so long as they were focused on a heavy metal band virtually unknown to the general public, Orthodox Christian activists did not have an outsized impact. But last year Church representatives upped the stakes, attacking the popular outdoor festival Kubana, held in a Black Sea resort for several years prior and which hosted local acts alongside the likes of Korn, System Of A Down, The Offspring, Gogol Bordello, The Prodigy and Die Antwoord. Accused by the Church of "promoting unhealthy lifestyles," the festival was ousted from its venue and intended to move to the Northwest exclave of Kaliningrad for the 2015 edition. Despite that concession, just weeks before this year's festival was scheduled to kick off, local authorities conceded to Christian Orthodox activists' protests and cancelled the event, forcing a move to neighboring Latvia, which created significant hassles for Russian fans, requiring that they apply for Latvian visas to attend.

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Curiously, despite attacks from those defending "traditional values" and the overall anti-Western rhetoric from the authorities, some Western acts continue to play in the country, even at official government-funded events.

In early September, Aerosmith played a set at "the Day of Moscow," a highly publicized and popular celebration in the Russian capital, puzzling some.

"[They are sending] conflicting signals," prominent music critic Artemy Troitsky tells Billboard. "Overall, the situation is sad. Unlike in the '80s, when rock music and music in general played an active and positive role in changes that were happening in the country."

"Back then, songs by [rock bands] Kino, DDT, Akvarium, Nautilus Pompilius and others were the soundtrack for Gorbachev's reforms," he added. "Today, Russia's music community has taken a very vague and cowardly stand, except for just one or two people."

LOYALTY TEST

Since the mid-1990s, the lion's share of Russia's pop and rock artists have either been apolitical or shown loyalty to the Kremlin.

But this past summer, producer Vladimir Kiselyov boldly stated that aging pop stars are not loyal enough and there is a need for a new media group that would foster younger "patriotic" artists as opposed to "ideologically wrong" Western acts, an initiative which redolent of the Communist era.

Kiselyov, a former member of the pop act Zemlyane, came to the limelight again a few years ago when he organized a charity event attended by Sharon Stone, Kevin Costner and President Vladimir Putin, who crooned Fats Domino hit "Blueberry Hill."

Under Kiselyov's proposal, greenlit by the government, state-controlled concert promoter Goskontsert will acquire Russian Media Group (RMG), the owner of several radio stations and a TV network, through a loan from state-run bank VTB. RMG's assets would subsequently become the centerpiece of the new "patriotic" media group, which Kiselyov would run as general producer. The proposal generated harsh criticism from RMG employees, artists and their producers. Several major producers and artists even tried unsuccessfully to buy out RMG from its current owner, the investment company Kapital, to prevent the "patriotic" deal from going ahead.

Opponents of the deal and observers claimed that Kiselyov has ulterior motives -- using the blessing of the state to consolidate these businesses -- masked as ideology. "It is all about money on both sides," says Troitsky. "True, Kiselyov uses some ideological and pseudo-patriotic rhetoric, but I think he isn't using it very effectively and persuasively, and the same goes for his opponents."

He added that conflating artists and producers who oppose the deal with those who oppose the Kremlin is ridiculous. "Thinking that they are to any extent in opposition to Putin is total rubbish," he said. "Both sides in the conflicts are total demagogues and conformists."

DIGITAL GROWTH

One segment that has remained free of ideological and political pressure, so far, is music retail.

Last year brought the symbolic end of the physical format era in Russia; the segment's contraction led to the closure of all remaining brick-and mortar outlets of Soyuz, once Russia's biggest nationwide CD chain.

Meanwhile, companies in the digital space, especially streaming services such as Zvooq and Yandex.Music (the music service of Yandex, "the Russian Google") appear to be doing well.

"We've seen local music services closing down because of [an overall economic downturn in Russia], or losing part of their catalogue, and foreign players leaving," Konstantin Vorontsov, head of Yandex.Music, told Billboard. "However, demand for digital music isn't declining… there is growth."

According to Vorontsov, in the legitimate music market the economic downturn has been a catalyst, pushing people to switch from buying individual albums and tracks to the cheaper subscription and streaming models.

"We've been seeing growth of streaming and decline of pay-to-download services over the last couple of years," he said. "The launch of Apple Music and, in general, Apple's launch of a subscription model is the most vivid testimony to that. For users, and, especially, dedicated music fans who are used to discovering new music and listen to many various track, the streaming model turns out to be generally more suitable."

Still, one of the world's best known streaming services, Spotify, cancelled plans to enter the Russian market. To some extent, the government played a role in scaring it off,  introducing new regulations for personal data protection under which Russian citizens' personal data would have to be stored in the country, an impossibility for a cloud service like Spotify. Spotify had planned its Russian launch in early 2015, and even opened a Russian office, before announcing it would cease moving forward with its launch.

FROM PIRACY TO TRANSPARENCY

On May 1, 2015, new amendments to Russia's copyright law came into effect, extending copyright protection measures, previously applied only to videos, to music tracks as well, part of an effort by the government over the past several years to crack down on the country's online pirates. The amendments simplified the procedure for rights holders to request the blocking of infringing websites, removing the previous requirement that a court ruling be secured.

While the government has presented the amendments as a breakthrough in the fight against online piracy, but rights holders remain unconvinced.

"We haven't seen a substantial decrease in the number of pirate online music services, which don't pay royalties to rights holders, and their audience isn't contracting either," said Yandex.Music's Vorontsov. "On pirated web sites, you can still find almost any music, listen to it online and download."

Illegitimate websites may remain undeterred, but the tightening of the copyright law has, at a minimum, pushed legitimate companies involved in dubious practices to clean up their act.

VKontakte recently signed a goodwill agreement with Sony Music Russia following lawsuits filed by Sony alongside Universal Music Russia & Warner Music UK.

For years, rights holders have been complaining about VKontakte's music service, which allows users to upload music tracks that then become available for streaming (and, thanks to some applications, for download). VKontakte's boilerplate response has been to say it is willing to quickly remove any illegitimate material at a rights holder's request -- but that has no control over user-generated content.

Most recently, though, VKontakte has been reportedly working with rights holders on the creation of a legitimate music service.

The government has expressed an interest in exerting more control over copyright royalty collection, an area that it already controls by issuing accreditation to collecting societies. In late summer, the communications ministry came up with a proposal for drastic reform in the country's copyright royalty collection system.

The proposal accused the existing, state-accredited collecting societies - RAO for author's rights, VOIS for neighboring rights, and RSP, which collects a one-percent tax on imports of electronic devices that can be used for copying content -- of insufficient transparency.

Incidentally, the three collecting societies announced a merger, just weeks before the government initiative which all three heavily criticized.

In the midst of the ensuing controversy, Andrei Krichevsky, RAO's deputy general director and head of Melodiya label, was attacked and beaten up in central Moscow. He suffered broken ribs, nose and cerebral trauma and still remains hospitalized.

Most recently, police have opened a probe into RAO, on allegations that the organization embezzled 500 million rubles ($7.4 million at the current exchange rate).

Over the last two and a half decade, Russia's music sector has gone a long way. Built from scratch, it made major steps to become part of the international music industry. But, most recently, it has been receding back into jingoism and walling itself off from the world.

And, against that backdrop, a recent initiative of Russian legislators, under which 75 percent of all music on the air should be local, doesn't look surprising. It is not yet clear if the initiative will be adopted, but if it will, the country's music sector will be set back even further.