Russia's Tech Sector Is Booming
Russia's e-commerce sector now accounts for 10% of GDP and is expected to expand by another 20-25% to reach RUB1 trillion ($17bn) in 2016
This article originally appeared at Business New Europe
Most of Russia's economy will be in the proverbial dustbin in 2015, except for the technology sector. The gadget-loving Russians have been driving the explosion of e-commerce in recent years, which is now starting to spill over into technological innovation and software development.
Instead of the ruble's fall killing off online businesses, the first thing that Russians reached for was their mouse. Russia's e-commerce sector now accounts for 10% of GDP and is expected to expand by another 20-25% to reach RUB1 trillion ($17bn) in 2016, almost double its size in 2013 of RUB520bn, according to Russia's Association of Online Vendors.
The penetration of online shopping leapt to the fore during the devaluation of the ruble in December. In the space of two days the ruble dropped from RUB53 to the dollar to RUB80 at its low point in the middle of December. Exchange rate-savvy Russians immediately logged on to online retailers to buy up things like computers and phones at the suddenly reduced prices before manufacturers had a chance to react to the collapse of the ruble. Apple's Russia online store was forced to close after it was bombarded with orders for the latest iPads and iPhone 6, which (briefly) cost a third less than the same products in London or New York stores.
China has been the biggest winner. Online retailer Alibaba was already Russia’s largest online retailer with a 35% market share in 2014, as Russians have realised they can easily buy goods cheaper abroad than at home. Alibaba's AliExpress and China's eBay now account for about 60% of all cross-border sales in Russia, which have risen from $3bn in 2013 to $5bn in 2014, according to East-West Digital News. US website eBay took second place with 30% of the market, and US retailer Amazon was in third place with 7.5%.
A another study conducted by EWDN together with Ernst & Young, PayU, Qiwi and Russia's dominant search engine Yandex estimates that Russia’s cross-border sales could rise to $4.2bn in 2016 under the pessimistic scenario, or as high as $13.5bn under the optimistic one. Just under half (48%) of all spending is on clothes, followed by accessories (34.6%). The average spend is RUB2,700 ($58.6), although half the shoppers don’t spend more than RUB1,500 ($32), the survey found.
Russia's e-trade with other countries is doing well, but the domestic market is the bigger business. Russia’s domestic online retail market grew by 25% in ruble terms and 12% in dollar terms in 2014, according to a study by research agency Data Insight, payment aggregator PayU and e-store service InSales. Some 30mn Russians now shop regularly online, with the highest increase being registered in children's goods and beauty products.
Last year saw lower growth rates than in previous years, says Denis Lyudkovsky, president of the Association of Internet Trade Companies (AITC), but Russia's domestic e-commerce business is easily outstripping the rest of the economy, which is estimated to have grown by a mere 0.5% in 2014. “Despite the general slowdown of growth rates of retail both in online and offline, we expect growth up to $20bn as of the end of 2014," Lyudkovsky says.
Sales had been expected to hit $24bn in 2015, although the currency crisis has introduced a lot of uncertainty over retail's fate this year. But long-term expectations remain high: Russian e-business could reach the $100bn mark within 10 to 15 years, reckon experts.
Russia's geography is partly why internet retailing is doing so well; even residents of the most remote regions, who were limited to their local produkti or the ubiquitous Universalnyi Magazin department stores, can now go on a virtual shopping spree in Moscow or Paris, relying on Russian Post to deliver their purchases within a few weeks at most.
Russia already has more internet users than Germany and growth of the internet in the regions is expected to drive overall growth this year. The AITC expects that the number of internet users in Russia will reach 73mn people by the end of 2015. Russia is currently in the "fat" part of the e-commerce growth curve, where a critical mass of users has started to buy things online, but online shopping is still not part regular shopping habits: only half of Russia's internet users purchase online, while in the UK the number is closer to 80%.
Computers, smartphones and e-shopping have become part of everyday Russian life, creating the virtual platform for innovation. Despite its reputation for exploding televisions in Soviet times, modern Russia is starting to tap into its former prowess in the military and hard science fields to develop new technologies in the real world too.
In December Livemap, a small Russian tech start-up, launched the world's first 'smart' motorcycle helmet featuring built-in GPS navigation, complete with a Star Wars-like display on the helmet's windshield that is based on fighter pilot 'heads up' technology. The company was raising money at the end of 2014 and the helmet is supposed to go into production this year.
Further advanced is the Russian-made Yota phone. Yota is a leading provider of mobile internet services. However, last year it launched the first ever Russian-made smartphone that has a regular screen on the front and an e-book reader on the back.
The device has been well received, but sales outside of Russia are mediocre. So the company launched a $100mn private placement in November to raise funds to develop the YotaPhone 2 and market it to the rest of the world. A spokesperson for industrial corporation Rostec, which holds 25% in Yota Devices, confirmed that the smartphone maker is looking for investors.
Luxoft's biggest market is the US, which accounts for a third of its revenue, followed by Germany with 17%, president and founder Anatoly Karachinsky told bne IntelliNews in an interview at the time of the IPO. And the company hopes to raise its revenue from $398mn in 2013 to over $1bn by 2019; sales in 2014 were $520mn and the company hopes to top $661mn of sales this year.
At the same time US companies are travelling in the other direction. Google expanded into Russia but has managed to gain only a fifth of the market for searches against Yandex's three quarters. In November browser-maker Mozilla decided to pre-install Yandex as the default search page for its Firefox browser in Russia. “Yandex Search will become the default search experience for Firefox in Russia… Google, DuckDuckGo, Ozon.ru, Price.ru, Mail.ru, and Wikipedia will continue to be built-in as alternate search options," Mozilla said in a statement. “Google has been the Firefox global search default since 2004. Our agreement came up for renewal this year, and we took this as an opportunity to review our competitive strategy and explore our options.”
Likewise, Russia's leading mobile phone operator VimpelCom, which sells phone contracts under the Beeline brand, teamed up with US firm Twitter to boost web use by phone users. The partnership will enable VimpelCom to launch an extended portfolio of Twitter services aimed at the mobile giant's 223mn customers in emerging and developed mobile markets.
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