Rising Consumerism in Russia

After the 1998 financial crisis, the Russian economy has largely regained momentum. The strength of oil prices has benefited Russia, as oil and energy products contribute to a substantial portion of the country's economy. Oil prices will likely remain stable over the medium term, thereby helping the Russian economic boom.

Given higher incomes along with robust economic growth and a stable political environment, Russians are willing to spend more money to improve their living standards. The average monthly wage has more than tripled to over US$300 from 2001. However, such official figures have understated the actual income level, as a considerable portion of business activities and incomes of the private sector are not recorded by official statistics. It is estimated that actual incomes, including the unreported earnings of most residents in Moscow and St. Petersburg, the two largest and richest cities in Russia, now amount to some US$700 – US$1,500 per month.

As it now stands, some 30 million Russians, or 20% of the total population, belong to the middle-income class. The rising middle class, aided by easy access to personal credit, has greatly increased Russians' purchasing power. Moreover, Russian consumers have relatively high disposable incomes because personal income tax, at 13%, and the cost of housing and utilities, constituting 10% of total household incomes, is low. High disposable incomes, coupled with the desire to improve living standards as well as robust income and credit growth, have resulted in strong consumer demand. Middle-aged Russians, especially males, are willing to spend more money on their appearance for a smart and modern look.

What to Buy?

As stated, housing and utilities only account for 10% of Russian household incomes, which is the lowest among Central and Eastern Europe and the CIS. Some 80% of the incomes of Russian consumers are spent on goods and services. Product-wise, about 10% of the total expenditure on goods and services is spent on wearable and related items, including apparel, footwear and fabrics. Other major items of household spending include transport means, domestic appliances and furniture, TV sets and consumer electronics, and hygiene and pharmaceutical items, as consumers pursue better living conditions.

In the meantime, there is an increasingly mature brand culture among consumers, especially for the Russian high-income class. Russians, especially those residing in major cities, generally have a good knowledge of both local and reputable international brands. But even with the increasing purchasing power of the Russian population, only the high-income group can afford high-end international brand products. Hence, value-for-money products are still chosen in most cases.

Why Hong Kong and the Chinese Mainland?

Many Russian companies have increased their sourcing from Hong Kong and the Chinese mainland. This is because the cost of mainland-origin products is competitive, and the profit margin for sourcing from Hong Kong and the mainland is high. Indeed, many Russian companies have increased their ODM and OEM orders from both Hong Kong and mainland companies. In addition, Hong Kong has an edge in acting as a sourcing platform for Russian buyers because Hong Kong, with its cluster of traders and manufacturers, is well known for its professional management skills, quality control and provision of customised sourcing services.

As a sourcing hub, Hong Kong is able to supply a wide range of products to satisfy Russia's enormous demand. Against this background, Hong Kong's total exports to Russia increased by 15% to US$578 million in 2006, ranking as the third largest market in Central and Eastern Europe, after Hungary and the Czech Republic. But given the size of the country, which has a population of over 140 million, there is much room for market expansion. Products of particular interest to Russian buyers include consumer electronics, household appliances, clothing, footwear, toys and games, sporting goods, gifts and premiums, timepieces, jewellery, building materials, housewares and furniture.

Tips for Doing Business with Russia

To explore business opportunities in the Russian market, Hong Kong companies need to be aware that the "made in China" label is still associated with a negative image. Brand differentiation is therefore suggested, using the "made by Hong Kong" label to distinguish Hong Kong products from indigenous Chinese ones. As there are few Asian brands that are popular in Russia, the timing is good for Hong Kong companies to develop their brands in Russia to target the emerging middle class with value-for-money attributes, characterised by good product quality at affordable prices and European designs.

Hong Kong exporters should also be more flexible in accommodating the needs of Russian importers and traders for small orders, and consider giving credit to Russian buyers who have a favourable track record, sound credit background and good relations between the two parties. In addition, Hong Kong companies may consider exporting on an SKD or CKD basis rather than finished goods to Russia, with a view to saving on import tariffs. However, customs clearance is still a great challenge for Hong Kong exporters in Russia. It is recommended that Hong Kong exporters let their Russian counterparts or Russian customs brokers handle customs issues.

Last but not least, Hong Kong entrepreneurs should take the initiative in approaching Russian distributors and traders. Many Russian distributors and traders like to meet the owners of Hong Kong companies rather than their staff members, so they can build up better and closer relations with their Hong Kong counterparts. Hong Kong exporters, in particular, can approach Russian national distributors and budding retail groups directly, including hypermarket/supermarket groups and chain store groups, which can help them penetrate the market efficiently.

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