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Doing Business in Russia Is No Mystery Wrapped in an Enigma

Cross-border online shopping is flourishing despite the sanctions

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This post first appeared on Russia Insider

The author is Chairman, Disciplinary Committee, National Association of Corporate Directors, Russia

There is a point of view in the West that “It is impossible to do business in Russia or with Russians” which continues to persist in this millennium despite facts. It doesn’t help matters when at election times both in the US and Europe the ghosts of “evil empire, autocrats, bandits and red menaces” are dragged from closets, dusted off, and become black hat hacker pumpkins suitable to grace even the most extreme Halloween display. Perhaps its roots were in the 70 years of business in the Soviet Union, so entirely different from business practices in much of the world, commanded by peculiar worldviews and directives from the Communist party. That apparition was put to rest a quarter century ago which then allowed for the rebirth of business in Russia.

Human nature tends to cosset views that are warmly comfortable, glossing over failures to engage successfully because, well, “they’re Russian and all that”. Old reliable enemies, if they were good enough to avoid then, then they are good enough to ignore now. Perhaps it is the language, the culture, a practical worldview, or the remote northern location of earth’s largest territories. Whatever the reasons or justifications not to engage in business the fact is Russia is in the business of doing business. It is as simple as that, no meddling or preaching, and certainly, no mystery wrapped in any enigma.

One such example in this digital millennium is e-commerce in Russia.  Since broad introduction starting circa 2002, the market depth and value then was essentially zero. Today e-commerce is a core vehicle used by all manner of firms and enterprises involved in B2C, B2B and B2G and it is still growing.

The smallest component of the e-commerce market today is B2C, which beset by growing pains in the areas of connectivity, payment acceptance, processing, as well as delivery infrastructure. In 2015 terms B2C retail accounted for 30 million online shoppers in Russia placing 148 million orders. The domestic value of these orders was $10.5 billion, and cross-border was $3.4 billion.

The first regional markets to enjoy initial B2C access were Moscow and St. Petersburg due to concentration of population and ease of delivery. However, the rest of Russia, a market that is at least as large if not larger is still developing. Experts believe that the Russian online retail market – which still accounts for only 2% of total retail, has real long-term growth potential for both domestic and foreign players.

Online shopping is already becoming a rather common method of consuming for active Russian Internet users, particularly those with upper middle and high incomes living in Moscow, St. Petersburg and large Russian cities. Online shopping in Russia eventually will catch up in the long term with more digitally advanced countries where 80% to 85% of Internet users are involved in online shopping. It has been estimated that B2C involved 26 million internet active Russians in 2014. The figure exceeded 30 million in 2015, and this figure should double by the end of this decade. Three groups drive this online shopping growth: individuals in the regions, especially in small towns, individuals with low incomes and individuals recently connected to the Internet.

Due to its present comparatively small market size Russian online retailers are noticeable for their smaller sales volumes when compared with major global players. In certain segments, there are no major developed firms due to a lack of significant investment, presence, and the existing small e-merchants that generally afford poor service mainly due to limited stocking ability. This situation particularly affects the fields of construction materials, automobile parts, furniture, plumbing and similar niche industries. These opportunity areas are wide open to enter, and develop.

Foreign retailers’ online sales of goods to Russia have grown these past few years. The market achieved approximately $3.4 billion in 2015, up from $1.3 billion in 2013.  Foreign online retailers have an advantage with Russian consumers in that many products are simply not available or found on the domestic market, especially in the vast interior regions.

Despite additional delivery costs, many products are still cheaper if bought cross border than on the domestic market. This may explain much of the attractiveness today of Chinese online retailers in Russia like AliExpress, especially in these “crisis/sanctioned” times. In comparison, many European and US western retailers lost their competitiveness as the then volatile ruble lost half of its value in this current energy price and sanctions period. Some are regaining lost market share, mostly by making a commitment to the Russian market, like Leroy Merlin, which in 2015 started building a 100,000 square meter fulfillment facility near Moscow’s Domodedovo airport.

As the saying goes; “and this too shall pass”. The crisis, the drop in energy prices, geopolitical indigestion are transitory albeit painful phases. Due to these factors however, the entry price into the Russian market is quite low and opportune in this phase. The bottom line is that the Russian market exists, it is in a growth mode, is investor friendly and not a transitory event worth ignoring. It is a market that must be personally visited and assessed, as first hand is far more objective than any written words in this MSM day and age. Those who choose not to step up and engage with this market, the benefits, no pun intended, will certainly pass them by too.

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