The real reason iPhones now cost $1,000 in Russia

The declining value of the Russian ruble is leading foreign companies to raise the ruble-denominated prices they charge in Russia, with Apple’s iconic iPhone brand serving as a key indicator:

This means an entry-level iPhone 6 in Russia now costs about $1,000, which may seem like an awful lot to Americans accustomed to thinking of a new smartphone as costing $199. But while these new prices are on the high side, they’re actually not that out of line with international norms.

They key thing to understand is that while you can get an iPhone 6 for $199, the real price is $649. The way you get a $199 iPhone is that, when you agree to sign a two-year contract with Verizon or AT&T, they give Apple $450 to defray your purchase price. In exchange, you pay a much higher monthly service rate to Verizon or AT&T than what T-Mobile charges. In effect you are receiving a high interest loan from your friendly wireless provider, which obscures the true cost of iPhone ownership. In foreign countries, you normally don’t have these subsidies and mobile service plans are cheaper instead.

Still, that leaves us with a $350 price gap to explain.

The biggest factor here is probably taxes. As Vernon Silver wrote in February, most European countries (and China) levy relatively high taxes on iPhones. This creates a substantial underground trade in buying iPhones in the USA (or Hong Kong) and then reselling them in the gray market. Generally the highest iPhone prices are in Brazil and Argentina, who engage in a very high level of protectionism in the electronics market. In Italy, an iPhone costs $998 and in France it’s $971.

Russian taxes aren’t quite that high, but the new price isn’t far out of line with European norms. Which is to say that while the high price of a Russian iPhone is a convenient and easy to understand symbol of the country’s current economic problems, it’s not a very accurate symbol. The US-Russia price gap is overwhelmingly driven by telecommunication company pricing strategies and tax issues, not anything to do with oil or Ukraine.

The extra factor is that Apple is probably building itself some wiggle room in case of further currency instability. Currency prices shift on a daily basis, but if Apple tried to move the price of iPhones up and down like that people would be infuriated. Setting a very high price means that Apple is covered in case the ruble keeps falling over the next three months. They’ll be able to preserve profit margins without raising prices again. Conversely, if the ruble stabilizes or gains strength, this sets Apple up for a price cut and a nice PR boost.