Saying ‘nyet’ to Apple’s iPhone by Philip Elmer-DeWitt @FortuneMagazine July 16, 2013, 2:35 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons From Russia without love. FORTUNE — There’s good money to be made selling cell phones in Russia, a country with more than 180 million mobile subscribers. Three Russian carriers account for eight out of 10 of those mobile phones, and there’s enough money to be made reselling them to make Maxim Nogotkov, the college drop-out who runs the country’s second-largest independent chain, one of world’s youngest billionaires at age 36. There’s also good money to be made selling iPhones — a product with enough cachet among Russia’s nouveau riches that at one point last September a black market iPhone 5 could fetch $3,700 in Moscow or St. Petersburg. But 10 months later, there’s not an iPhone to be had at any of the big three carriers’ stores. Last week the last hold-out – VimpleCom, which sells phones under the Beeline brand — cut its ties with Apple AAPL and began offering its customers Samsung’s Galaxy S4 instead. What happened? What makes Russia different from the rest of the world? Here are three factors I’ve been able to identify: Russia’s big three. Chart: AC&M consulting via Wikicommons. No subsidized pricing. Mobile phone licensing in Russia is controlled by a federal agency called Roskomnadzor, and Roskomnadzor does not permit the kind of subsidy programs that allow U.S. buyers to purchase an iPhone 5 for $199 or an iPhone 4 for $0. Import duties and taxes. They’re high, even for Europe. They raise the price of an unlocked iPhone 5 from $649 at apple.com/us to $918 at apple.com/ru, the online store that Apple opened two weeks ago. According to Apple, $140 of the extra cost is Russian VAT (value-added tax) and $129 is foreign exchange, import duties and fees, and channel mark-up. (Why Apple has to pay channel mark-up at its own company-owned site may be one of those mysteries only its Irish subsidiary can answer.) Competition. A report in iPhone Arena about Beeline’s decision to drop the iPhone 5 and sign a deal with Samsung attributed it to “draconian contracts” and “harsh conditions… especially in the marketing department.” After MTS, Russia’s largest carrier, dropped Apple in favor of Microsoft’s MSFT Windows Phone, CEO Andrei Dubovskov told Bloomberg: “Apple wants operators to pay them huge money subsidizing iPhones and their promotion in Russia.” I haven’t read these contracts, but I doubt that Apple actually demands that carriers share the cost of marketing and promotion. This sounds like spin from the operators — their way of charactizing the higher prices Apple demands for its mobile devices. But what is almost certainly true is that the lack of subsidized pricing and the high import duties and taxes can give an aggressive competitor trying to grow its market share plenty of room to undercut Apple — and not just in terms of their percentage of the take. Contracts can contain all kinds of sweeteners and the opposite of sweeteners, like the commitment Apple has been known to put into its contracts that require a carrier to buy a larger number of iPhones than that carrier might think it can sell. Russian consumers can still buy iPhones at Svyaznoy — the mobile phone chain started by billionaire Maxim Nogotkov — and Apple is rumored to be building a brick-and-mortar store in Moscow’s Red Square. [And as reader Vicious Cur suggests, Russia's gray market may be sufficiently efficient to satisfy a fair share of the country's demand for iPhones.] But Russia’s unique market dynamics have taken their toll. Microsoft’s share of the Russian smartphone market, for example, grew to 8.2% last quarter compared with 5.1% a year earlier, according to IDC. During the same period, Apple’s share dropped to 8.3% from 9%.