Russian Consumer Power Attracts U.S. Business

Russian consumers continue to be hungry for Western goods and services. The wealth generated by Russian exports of oil and gas provides Russian consumers with the means to purchase those products. U.S. corporations such as McDonald’s and Starbucks were quick to take advantage of opportunities in Russia. Even Wal-Mart opened a Russian office in January 2009, which is viewed as the company’s first step to opening stores in Russia. Medium-sized U.S. businesses are just beginning to focus on Russian markets.

Russian Consumer Power
How much disposable income do Russian consumers have? Comparing the consumer power of different nations can be difficult because the relative cost of living is so different in various countries. One measure of consumer power is Purchasing Power Parity which takes account the relative cost of living and the inflation rates of the countries. According to the World Bank, Russia is ranked 7th among nations in terms of Purchasing Power Parity, with only the US, European Union, China, Japan, India and the Germany ranked higher. Thus Russia is ranked above powerful consumer nations such as the United Kingdom, Australia, Brazil Sweden, and Switzerland.

In the past nine years, the growth of the Russian Gross Domestic Product growth has averaged 7%. Russia household consumption and fixed capital investments, which have both grown by about 10% annually since 1999, are now the primary drivers of growth.

The bottom line is that Russia is an important market for consumer goods and many American businesses are targeting Russian markets. U.S. exports to Russia are dramatically increasing; from 2006 to 2008, US exports increased 50%. Direct investment in Russia by U.S. companies and subsidiaries is also increasing significantly; from 2004 to 2008, US investment in Russia increased by 300%.

Russian Consumers
When considering Russian consumer power, the demographics of Russian are awesome. Russia has a population of 140 million. About 73% of all Russians live in urban areas. About 20 million Russians are under 14 years old, which is a huge market for children’s products, such as electronic games. The 100 million Russians aged 15 to 64 are a massive market for consumer products such as televisions, mobile phones, and laptops. About 20 million Russians are over 65 years old, which represents a major market for products such as hearing aids and medicine.

Doing Business in Russia
Good fiscal policy has stabilized the inflation and exchange rates, according to the U.S. State Department. Russia has had a budget surplus every year since 2003 and been able to set up a large stabilization/rainy day fund ($156 billion in 2007).

Russia has been implementing economic reforms in the tax, banking, labor and land codes to improve the business climate. To join the World Trade Organization, Russia has found it necessary to modernize and regularize its regulations and laws to comply with international trade standards. Entrepreneurship in Russia is thriving, and there are more small and medium-sized businesses in Russia. As a result, U.S. companies will find more innovation and less bureaucracy when doing business in Russia.

What Does Russia Import Now?
In 2007, 54% of Russian imports were machinery, equipment and transport equipment. About 14% or Russian imports were chemical products and rubber. Food products and agricultural raw materials were also about 14% of Russian imports.

There was a total of about $27 billion of import/export business in 2007 between America and Russia. In America exported about $7.4 billion in goods to Russia in 2007. This was an increase of 57% increase over 2006, which is a dramatic increase. Among the export markets for US goods, Russia is currently the 20th-largest U.S. export market. U.S. businesses exported machinery, vehicles, meat (mostly poultry), aircraft, electrical equipment, and high-tech products to Russia.

Wireless communication is extremely popular among Russians. The mobile penetration in Russia is about 100%. There are about 190 million subscribers in Russia with a 131% penetration rate as of February 2009.

The technology used in Russia includes:
1. GSM (Global System for Mobile communications) – most popular international phone technology. The fact that it is used in 212 countries means that subscribers can use their phones in many parts of the world.
2. GPRS ( General packet radio service) – can be upgraded to SMS (Short Message Systems) which are very fast and also Multimedia Messaging Service, which sends messages that include multimedia objects (images, audio, video, rich text).
3. EDGE (Enhanced Data rates for GSM Evolution) – allows improved data transmission rates. EDGE is considered a 3G radio technology (now deployed by AT&T in the US.)

American businesses will have no problem finding Russian companies that want to purchase mobile phones. Many Russian companies advertise on trading web sites that they want to purchase mobile phones. For example, one Malovatov S.N. has been trading GSM Mobile Phones in Russia since 2001. Malatov buys new new GSM Mobile Phones manufactured and certified for to be distributed in Russian Federation. The Malatov ad states that they are open to any reliable suppliers of brand new GSM mobile phones and provides contact information. Malatov is just one of the companies seeking mobile phone suppliers.

In addition, Russian companies are seeking suppliers of laptops, ipods, pda, televisions, and radios. For example, Lincon Corporation in St. Petersburg is seeking suppliers of certain brands for these products, including Acer, Dell, Samsung, Sony, Toshiba. Another company, Agro Dynamics had an ad that they are seeking suppliers for a range of products including laptops, as well as tractors, buses, cables, mini-trucks, fertilizers, and welding machines.

Many people do not realize that Russia has extensive broadband lines that provide high speed internet access. There are about 4.9 million broadband lines in Russia, as of 2007, of which about 72 % are cable modems and the rest are DSL.

About 75% of pharmaceuticals sold in Russia are imported, and there is particular demand for innovative drugs. The value of Russian pharmaceutical imports is estimated at $6.1 billion USD in 2006, which is an increase of 43.4% over 2005. Germany and France provided over 30% of imports of pharmaceuticals to Russia. These growth rates represent a big opportunity for US business. While Germany and France are the biggest suppliers of pharmaceuticals to Russia (30%), there is plenty of room for US business in this market. As the 100 million people are in the 15-64 age bracket get older, there will be a continuing and expanding demand for pharmaceuticals that can be supplied by US companies.

Russia is expanding health insurance for its citizens and this is likely to improve their ability to purchase health care products. In January 2005, Russia established a new system of providing drugs to vulnerable population groups. By 2010, Russian plans to implement health insurance that will enable all of her people to obtain free or low-cost prescription drugs. This program will certainly increase demand for pharmaceuticals in Russia.

Opportunities for U.S.-Russian Business
U.S. businesses are already exporting machinery, vehicles, meat. aircraft, electrical equipment, and high-tech products to Russia. Telecommunications and pharmaceuticals are just two examples of the markets in Russia with great potential for the future. U.S. companies seeking to expand sales have every reason to check out the market for their goods and services in Russia.