Russia's Economic Crisis Bodes Ill for Hollywood Majors

Moscow Red Square - P 2012

Moscow Red Square - P 2012

Box office in dollar terms for U.S. movies is likely to be halved in 2015 after the collapse of the ruble

Russia's ruble crisis and international sanctions imposed after the Kremlin forcibly annexed Ukraine's Crimea territory earlier this year could push the country into a deep recession in 2015.

The collapse of the ruble — which has halved in value against the dollar, despite a brief rally following a mid-December panic — will mean slimmer profits for Hollywood blockbusters.

Overall box office — set to be close to last year's total of $1.37 billion, according to data collated by Russian trade journal Kinobusiness Today — may be much the same in ruble terms next year, but dollar takings will be in line with the value of the local currency, experts say.

Russian exhibitors, many of whom rent dollar- or euro-denominated cinemas in the swanky U.S.-style shopping malls that mushroomed during the boom year in Moscow, St. Petersburg, Yekaterinburg and other major cities, are already pressing to renegotiate contracts in rubles.

Raising ticket prices in line with the dollar exchange rate is unfeasible. Doubling ruble ticket prices from an average of around 250 rubles a ticket (precrisis around $7.50, postcrisis closer to $4.50) is a nonstarter. Hard-pressed Russians will simply stay at home, exacerbating the problem for exhibitors and distributors.

State-owned cinemas in Moscow, which account for 29 of the region's 688 screens, are planning to reduce ticket prices in response to the crisis. Although exhibitors of Hollywood fare are hardly likely to follow the counterintuitive move, maintaining footfall during a recession is a sound business strategy.

Cost savings for exhibitors and distributors are likely to come via staff cuts, Alexander Semenov, publisher and chief editor of Kinobusiness Today, told The Hollywood Reporter.

"There is already talk of cutting costs by reducing staff. The majors won't ax senior executives, but lower level employees are likely to take the brunt of this," he said. "A cinema that has two cashiers might decide one is enough, or a company with 10 employees will cut three or four jobs."

He also believes Hollywood majors will have to grin and bear lower dollar-denominated profits in 2015. "Ticket prices will remain the same in 2015, so box office for Hollywood films in dollar terms will be lower by the same ratio that the ruble is lower," he said. 

Figures collated by Kinobusiness Today for the year through mid-December show total ruble box office is just over 42 billion, equaling just under $1.15 billion, with calculations based on the average ruble/dollar rate when a film was on release. Admissions for the period, 175 million rubles, are not far short of last year's total admissions of 186 million rubles and higher than total 2012 footfall of 171.5 million rubles.

The biggest losers will be Russian distributors and producers, Semenov believes. "A lot of costs for producers and distributors are in foreign currency — equipment is imported, content comes from overseas. These expenses are hard to avoid, which is why local staff cuts are the easiest way to reduce costs," he explained.

Leading independent producer Alexander Rodnyansky, of AR Films, says the ruble crisis poses a real threat to many in the Russia film industry.

"It basically destroys the smaller distribution companies who have to pay minimum guarantees in dollars or euros but derive income from theatrical distribution in rubles. These losses cannot really be offset by TV sales, VOD or DVD distribution," he said.

It is too early to say how the crisis will affect his own projects, and he plans to wait until January or until the markets settle "before making any kind of major business decisions."

But the crisis certainly does not help. "Currency fluctuations also affect the studios. The final film of the Hobbit trilogy [The Hobbit: The Battle of the Five Armies] opened to $13.5 million in Russia, which is considerably less than the opening weekend of The Hobbit: Desolation of Smaug — $16.2 million," he notes.

Others are more sanguine about the prospects for the coming year.

Oleg Berezin, head of leading industry research firm NevaFilm and author of a recent book on economic cycles in the film industry, says the recession is part of a cyclical downturn that was due to hit Russian cinema around now.

"This is the downswing trend, but of course it will affect the business. Russians were very passive buyers at AFM this year, particularly those from the independent sector," Berezin said. "All distributors of foreign films are now receiving half in dollar terms and have to cut their expenses accordingly for everything from promotion to local office costs. And bank loans now have rates of up to 25 percent interest, meaning a lot of new cinema projects simply won't go ahead in the coming year."

The one ray of sunshine in such a bleak forecast is that "the entertainment business is generally stress resistant," according to Rodnyansky.