Note: one should always keep in mind that the Russian business situation is changing very rapidly, and that - in general - it is improving.

Russia's banks are offering more services and have become better integrated with the international system; the distribution system is quite well-developed in several industries; Russian businessmen have begun to capitalize themselves and have become more pro-active in specifying the sorts of products they want. Nevertheless, there are still some peculiarities of the Russian market that we try to explain here.

Capital goods / Equipment / Raw Materials

Q: What are the sectors of consumer goods most in demand in Russia?
Q: What is the level of market now in terms of quality and price?
Q: Aren't Russians poor?
Q: If Russians have spending power why is payment still a problem?
Q: Which is more important: price or payment/delivery terms?
Q: What is market for ex-stock goods or closeouts?
Q: What is the role of brand names in the Russian market?
Q: What are the main issues in selling into Russia?
Q: What are market conditions for Capital goods / Equipment /Raw Materials?

Q: What are the sectors of consumer goods most in demand in Russia?
A: The short answer is everything. Russian market for home appliances, consumer electronics, household good, garments, foot wear, cars and car accessories, food stuffs shows the stable growth during the last years.

The Soviet Union, with a few exceptions, was never strong at producing consumer goods. The decline in manufacturing output in Russia has hit the consumer goods sector even harder than the others. There were many reasons for this: financial difficulties, cost and quality problems, inefficient internal distribution. The result, however, was that till recently, the vast majority of manufactured consumer goods was imported. This situation will undoubtedly improve, but for the moment, the foreign exporter's problems have more to do with finding the right price/quality mix, distribution, credit and delivery terms, etc.

Q: What is the level of market now in terms of quality and price?
A: It would help to understand the history of the Soviet/Russian market since the first openings in the late 1980s. Until the first year or two of the 1990s, the main buyers were State Foreign Trade Organizations and certain Joint Venture companies who tended to buy in rather large volumes and immediately sell the goods off. This business was driven not so much by market demand, but rather as "exchange rate arbitrage": the ruble/dollar rate at auction might have been 40:1, but the ruble/dollar rate expressed in, for example, PCs, was 90:1 (this is a real case, dating from about 1990). Price was usually the over-riding factor in these deals.

As the market opened, Russians started to buy their first pairs of sport shoes, jeans or down jackets. Given that the market had very little experience with consumption, and that there was still little choice, consumers had great difficulty distinguishing between similar products of differing quality. In addition, the vast majority of goods tended to be brought in by so-called shuttle traders who would travel to Asia, Turkey, Eastern Europe and elsewhere, purchase goods on a semi-wholesale basis and bring them back. As a result, when a particular batch of goods sold out, they were rarely replaced with the same goods from the same supplier. There are numerous stories of down jackets whose sleeves came off after two weeks, shoes which fell apart in the rain, etc. If there was a time of "fast money" in Russia, it was this period, when low-quality goods sold in high volumes without a great deal of competition. This period started to come to an end in 1993, although certain features of it are still apparent today.

In 1993, there began the development of a luxury goods market large enough for companies to begin to take advantage of. German luxury cars began to appear in showrooms in Moscow and other cities, and French perfume and cosmetics shops began to open in GUM. This market, while lucrative, is not extremely large. In addition, the same Russians who purchased these goods have now started to travel overseas, and can compare prices around the world for the same goods.

1994 saw the beginnings of the development of a true middle class market, which demands good quality products at reasonable prices.

Companies which offered recognizable, standard products at standard prices - such as Procter & Gamble, Heinz, Mars - started to do very well.

There was a move away from 'no-name' electronics to brand-name electronics (TVs, computers, etc.). Service, support, distribution and advertising have started to become key factors in purchasing decisions.

Because of relatively high Russian imports duties and other related taxes and costs, imported goods are now relatively expensive, while locally-manufactured products are far more competitive. There is a marked tendency for foreign companies to manufacture in Russia if they can.

Q: Aren't Russians poor?
A: This is one of the major misconceptions about the Russian market. One can hardly argue that the Russian economy is in good shape, but it is not nearly as bad as the 'official statistics' make out. In the past few years, the economy quickly split into two parts: that part which was active in the market economy, and that part which remained tied to the old economic activities. While the latter has/had monthly wages in the range of $35-100, the former did far, far better. While the percentage of the population engaged in the 'market sector' is constantly growing, it is still rather small, amounting to several million people. Furthermore, these tended to be concentrated in Moscow, St.Petersburg and the other major cities.

Even in the times of "crisis", a visit to Moscow could confirm that there is little shortage of disposable income for at least this sector of the population.

Q: If Russians have spending power why is payment still a problem?
A: Yes, payment is still a problem and is the result of many factors. Having money in the pockets of consumers is not the same thing as having it in the bank accounts of importers and distributors. Most Russian importers and distributors are undercapitalized and bank interest rates are very high - if finance is even available, which it usually isn't. This shortage of finance means that there is a premium on cash and as a result the velocity of money is very high: money is turned over as quickly as possible. Therefore, even if a Russian importer had cash to pay for imports, he would probably prefer to use that money in other ways, rather than tie it up waiting for goods to arrive.

This is the reason why Russian companies often demand credit or consignment. And, of course, if the importer miscalculates the Ruble/dollar rate or miscalculates market demand, he may have difficulty generating the money with which to pay the supplier and often has no other resources on which to draw. This is one of the main risks in selling in Russia.

A word on payment terms, mechanisms and banks: Although the banking system in Russia has been improving during the last years, it is probably very hard to get a Russian L/C accepted by an international bank at the moment.

In our experience, companies that refuse to give credit or goods or consignment or who cannot at least offer 'cash and carry' service (via a warehouse in Russia or nearby) operate at a great disadvantage to those companies who are willing and able to operate in this way.

There are many good distributors in Russia now - the 1998 "crisis" has resulted in significant improvement and consolidation of distribution channels in many industries. Therefore, if a Russian company can demonstrate a good track record at moving product, it can usually demand good credit/consignment terms; if the Russian company cannot demonstrate this track record, then perhaps it is not so interested as a distributor after all.

See, therefore, the discussion on finding a good partner in the previous section.

Q: Which is more important: price or payment/delivery terms?
A: In general, it would seem that credit/delivery terms are weighted more heavily than price. This is not to say that price is no object, but rather if a Russian businessman shaves his profit margin by a few percent but either (due to credit or consignment terms) puts little or no money down or (in the case of immediate delivery) can turn his profit in a few days rather than weeks or months, this is preferable to maximizing profit on any given deal. Of course, there comes a point when goods are no longer competitive or sellable at a given price, but as long as one stays below that level, many suppliers will find that payment/delivery terms, not price, are the main decision criteria.

Q: What is market for ex-stock goods or closeouts?
A: In our experience, it has been very difficult to move these goods in Russia unless one already has a well-established set of connections there. The reason should be clear from the preceding discussion: ex-stock goods must usually move quickly and the payment/delivery issues usually cannot be worked out that fast

Once again, the objective should be to find a long-term partner who can move ex-stock goods on an on-going basis, rather to look for a buyer when all of sudden ex-stock goods are available.

Q: What is the role of brand names in the Russian market?
A: Several Western companies have developed very strong brand name recognition in Russia. Pepsi has been in Russia for decades, but Coca-Cola has managed to developed extremely good name recognition in only a few years. Procter & Gamble, Heinz, Mars, Maggi, Gillette, Nescafe, Philips, Samsung, Sony, Volkswagen, Audi and other companies all have good brand name awareness now and would probably attribute a reasonable amount of their success to this fact. In other items, from computers to luxury goods, brand name advertising and promotion is becoming increasingly common.

However, it is still relatively easy and inexpensive to build a brand name presence in the Russian market.

Q: What are the main issues in selling into Russia?
A: In addition to the issues of payment/delivery terms and finding a good local partner, the main issues is distribution and retail space. Russia's distribution system is still greatly underdeveloped. This is partly a result of infrastructure problems (poor transportation links in some cases), cost (high transportation costs), lack of local/regional wholesalers, etc. The situation is certainly improving - the computer industry, for example, is now showing characteristics (distributors, dealers, VARs, etc.) that are immediately recognizable to foreign marketing professionals.

However, companies in other fields, such as consumables, have found it necessary to set up their own nationwide distribution. Smaller companies who cannot afford this are probably well-advised to consider a local strategy -- build up a presence and market share in one region -- and use that as a jumping off place for a nationwide strategy. Moscow and St. Petersburg were the first obvious choices for a first jump into Russia, but and increasing number of companies -- especially those from the Asia-Pacific and the U.S. West Coast -- are starting with the Russian Far East.

Getting shelf space probably requires similar pro-active treatment.

Recently, a number of 'trading companies' have taken such aggressive pro-active steps such as assembling products in Russia and building their own distribution outlets (trends we predict will accelerate and continue).

Q: What are market conditions for Capital goods / Equipment / Raw Materials?
A: The prime factor governing the market for capital goods, equipment and raw materials is the state of Russian industry. While some sectors of Russian manufacturing are now picking up, the industry is not very healthy. Industry suffers from lack of capital (and high interest rates and the difficulty in borrowing for the medium- to long-term) and from cash-flow problems.

It can be very difficult for domestic manufacturers to pay for equipment, new advanced technologies or raw materials and local financing is usually hard to find. Foreign-invested manufacturing operations usually source equipment and materials directly from overseas.

Distribution and local service and support are other very important issues.

The result is that much of Russian imports in this area are financed by foreign aid or loans (often part of an explicit program and hard for outsiders to break into) or are part of an explicit Joint Venture. In fact, we commonly advise companies, rather than just trying to sell equipment, to consider contributing equipment and/or credit lines for raw material imports in exchange for equity in a Joint venture, which may very well end up more profitable than merely selling equipment.

However, this situation is improving in some ways -- leasing, for example, seems to be a more viable option than previously.