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With the Russian Ruble gaining strength against the dollar, and the recent dramatic rise in average disposable income, Russia is one of the most attractive emerging consumer markets in the world. Russia has far and away the largest population in Europe, at 141 million, which is over 60 million more than second place Germany. And the Russian economy is burgeoning, experiencing nine consecutive years of growth since the financial crisis of 1998, during which the average growth rate has been above 7%.
"The most striking thing [about the Russian economy] is the overall growth of consumer potential," according to an article recently published in Business Week. This comes as no surprise, as a recent Economist article found that never before have Russians shopped or traveled so much. Former President Putin has proclaimed that salaries in Russia are climbing at a rate of 16%, and the business section of Pravada.ru, a Russian news service, found that real wage growth has advanced more than 12% every month in 2008. Even those with low real incomes find most of that to be disposable, as many Russians reside in subsidized housing with low utilities costs. With disposable incomes (and retail trade) growing twice as fast as GDP, Russian domestic productivity has yet to catch up to the sixth largest consumer market in Europe, creating increased demand for imported goods. And this trend does not appear to be slowing down, with the Russian retail market set to grow 84% by 2011 to exceed retail sales in both the UK and Germany.
Best Import Markets
As an emerging middle class with disposable income fuels consumer demand, US exports to Russia increased by 57% in 2007 to over $7.4 Billion. According to the US Department of Commerce, automotive products, household goods, financial services, and retail products are particularly sought after. Additionally, a construction boom has created a need for equipment and materials, high oil prices are driving demand for oil and gas field equipment and services, and computer accessories and electronics are also in demand as the telecommunication industry in Russia continues to take off.
Regulatory and Tariff Climate
Perhaps the greatest challenge for a business looking to expand into the impressive Russian market is navigating the regulatory and tariff landscape. According to an article in Management Today, a UK magazine, the biggest headache for international businesses is the unpredictability and unreliability of the Russian bureaucracy. While import tariffs are not particularly steep, usually ranging from 5 to 20 percent on manufactured goods, non-tariff barriers to trade are a reality in the Russian market. Russian import legislation is often selectively interpreted, intellectual property rights are poorly enforced, discriminatory charges and licensing persist, and specialist firms like the Russia Import Company ensure that small levels of corruption remain. Despite these potential challenges, things are looking up on the regulatory front in Russia. The US and Russia have tentatively agreed to bilateral terms for Russian accession into the World Trade Organization (WTO), and Russia is currently in the process of negotiating further multilateral terms to gain entrance into the WTO. If Russia were to be accepted, their import practices would come under much closer regulation.
Online Marketing Opportunity
Despite an internet penetration rate of only 20.8%, Russia still maintains an internet population of over 29 million, which is currently the fifth largest market in all of Europe. And this number is poised to increase greatly as Russia leads the impressive internet growth throughout Eastern Europe. Internet World Stats cites that Russian internet penetration has grown 850% since 2000, and the trend does not show signs of slowing anytime soon. eMarketer estimates that the number of internet users will grow to around 60 million by 2012, and in the less distant future, Russia will be the second largest internet market in Europe by the end of 2008.
Additionally, both e-commerce and the Russian online ad market are on the rise. The online ad market is projected to double in 2008 to over $685 million and e-commerce has shown annual growth rates of 45-50% in both 2006 and 2007 according to an Economist Intelligence Unit report. While online credit card transactions remain limited by Russians historical distrust of retail banking, this trend appears to be diminishing as retail banking services have been rapidly developing as foreign players arrive. Small, specialized B2C companies currently dominate the e-commerce market in Russia with books, DVDs, and computers catching the greatest proportion of sales, but B2B e-commerce is burgeoning especially in the computer and office-equipment sectors.
Search Engine Profile
While most of the European search engine market is dominated by Google, Russia remains one of the rare countries where a domestic search engine has retained the largest market share. According to a European search engine report by ComScore, Yandex is the leading search property in Russia with a 47.4% market share, followed by "Google sites" at 31.2%, and another domestic search engine, Rambler Media, at 9.7% of the market. In fact, Yandex ranked third in all of Europe in terms of overall search quantity ahead of both Yahoo and Microsoft with 2.2% of all European searches in March 2008, despite being predominant only in Russia. And Yandex is actually looking to expand its scope internationally, as it is set to IPO on Nasdaq this autumn, planning to raise between $1.5 and $2 billion in its initial posting. Despite its efforts to diversify, Yandex remains dedicated to its domestic constituency. Before March 2008, Yandex had only been indexing web sites in Cyrillic languages, and while it has begun to expand its indexing scope, sites in these languages still get the highest rankings. And with Yandex and Rambler dominating the online advertising market in Russia, a businesses wishing to market in Russian would be advised to have some Russian content on their web site.
Summary
Russia is one of the most promising emerging markets in the world, along with the likes of Brazil, India, and China (termed the "BRIC" by Goldman Sachs). With the largest population in Europe, high oil prices driving purchasing power upwards, a quickly expanding internet population, and continuing negotiations to eliminate barriers to trade, despite its challenges Russia is developing into a premier market for businesses looking to expand internationally. Therefore, GLOBALeMARKETER gives Russia a Tier I ranking for global online marketing.
