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The changing face of Russia

  • While ending the country’s decade-long economic boom, the global recession has had the effect of speeding up the country’s pace of economic diversification, especially in the fields of energy, information and communications technology (ICT), bio-medical, space and atomic (nuclear) technologies.
  • In the wake of accumulated wealth over the past decade and emerging signs of recovery, the 50-million-strong Russian middle class is poised to regain momentum and continue to provide opportunities for Hong Kong-type products such as consumer electronics, fashion products, giftware, jewellery and toys.
  • Consumer goods aside, new opportunities are arising out of the country’s growing need for manufacturing inputs to feed its efforts at localising production, while niche opportunities in financial, legal, consulting, IT and construction services warrant further exploration.
  • As part of an effort to hasten economic transformation, Russia has also been taking steps to clamp down on its cumbersome customs administration and underground economy, while continuing negotiations for WTO membership.
  • Putting the auspicious outlook aside, Hong Kong companies should be wary of the challenges arising from the fragmented distribution landscape and low awareness of Hong Kong products, while capitalising on their role as a conductor in Sino-Russia trade.

Turning negatives into positives: diversification and localisation

Under the shadow of the global recession, Russia, with its high dependence on oil and gas exports, is beyond doubt one of the worst-hit economies in Central and Eastern Europe, resulting in a staggering GDP contraction of 7.9% in 2009. But the recent oil price jump following the budding global recovery has already put the country and its consumer market back on the growth track, triggering an upward revision of GDP forecast for 2010 from 3.2% to 5-5.5% by the World Bank.

While bringing the Russian economy to a shuddering halt and ending the country’s decade-long economic boom, the global recession has had the effect of speeding up the pace of economic diversification in Russia. To lessen dependence on raw materials and develop a new-look, knowledge economy, Russia has chosen energy, information and communications technology (ICT), bio-medical, space and atomic technologies as priority fields.

On the other hand, the country’s efforts at localising production also provide plentiful new opportunities for Hong Kong exporters. As a case in point, after Russia slashed import duties on parts and components of LCD displays and increased the import duties on completed LCD displays to support the development of the local LCD industry, a number of international giants such as LG and Samsung (of South Korea) and Vestel (of Turkey) have scaled up their production facilities in Russia. This, together with other similar measures such as duty cuts on imported skins and hides, dyes and leather used by the footwear industry, represents new opportunities for Hong Kong suppliers of industrial parts and components. Meanwhile, there are also openings for technologies arising out of the country’s pressing need for developing and adopting ICT, as well as renewable energy and energy-saving technologies, enabling Hong Kong to serve as a resource.

A recovering and transforming consumer market

In tandem with the improved standard of living and ever-rising consumerism, a lot of middle-class people (constituting roughly 35% of the total population in Russia, or 50 million) are indulging themselves with spending on consumption goods like branded fashion. Such a consumption spree is expected to continue, despite slackening somewhat in the immediate aftermath of the global economic turmoil. Given the lack of local consumer goods production, best opportunities for Hong Kong companies lie in supplying products such as consumer electronics, fashion (mainly garments, footwear and travel goods), giftware, jewellery and toys and games.

To successfully tap into the lucrative Russian market, one must bear in mind the saying of German Chancellor Angela Merkel that “Today’s Russia is not to be compared with the Soviet Union of the back then”. Russian consumers are much more fashionable and quality-conscious. Rather than buying the sizzle but not the steak, more and more Russian consumers, even among the luxury consumers, are looking for better designs and brands of better workmanship and fabrics, instead of just eye-catching labels or prestige that the brands are selling.

Merchandise aside, Hong Kong services providers should adopt a more proactive approach to explore niche opportunities resulting from Russia’s soaring services demand. In this regard, financial, legal, consulting, IT and construction services are believed to hold the most promise for Hong Kong services providers, thus warranting further exploration. To illustrate the growing interest in Hong Kong services, for example, it is reported that a number of Russian companies such as Ilyushin Finance Corporation (IFC, an aircraft-leasing company) and Russian Railways are considering listing in Hong Kong, on the heels of the initial public offer (IPO) of the world's largest aluminium producer, Russia’s United Company RUSAL, in January 2010.

Greater efforts to improve trade

With a goal of transforming the country into the world’s fifth largest economy by 2020, Russia has been taking steps to clamp down on its notoriously cumbersome customs administration and huge underground economy. To demonstrate its determination to improve trade, there has been a clean up in the Cherkizovsky (wholesale) market, which was the once best-known and largest marketplace in Europe, famous for low-end (and sometimes counterfeit) products coming from Asia. Its closure should help reduce competition from cheap products, while at the same time affording better protection to branded goods. There is also good news for Hong Kong companies that have suffered from onerous customs procedures in Russia, when Russian Prime Minister Vladimir Putin ordered in June 2009 the shift of customs clearance to the country’s border regions, thus cutting out the myriad “grey import” operators in Russia.

Another significant recent move is the establishment of a customs union among Russia, Belarus and Kazakhstan, effective 1 January 2010. The customs bloc allows the duty-free movement of goods between the three countries, establishes a common external tariff on imports from other countries, as well as removing internal barriers to trade while harmonising foreign trade policies. More importantly, the prime ministers of the three member states have indicated their willingness to join the World Trade Organization (WTO) as a single customs territory in addition to their sole applications. If this happens, overseas companies will have an easier time coping with trade regulations, while greater economic integration and adherence to the world trade rules should help the recovery and development of Russian trade.

Challenges and opportunities

Putting the auspicious outlook aside, Hong Kong companies should be wary of the challenges arising from the fragmented distribution landscape and low awareness of Hong Kong products, as well as the country’s troubling image with corruption, bureaucracy, cumbersome customs clearance and trade-financing problems. The fact that it is still rather difficult and expensive for ordinary importers to secure trade financing from banks in Russia may pose an overwhelming risk for Hong Kong traders dealing with Russian buyers that lack a sound financial track record. Meanwhile, the fragmented distribution landscape, coupled with changing sourcing practices and demand for greater assortment, complicates the issue further, hampering the competitiveness of Hong Kong exports under intensified price competition from indigenous mainland suppliers.

Given the challenging business environment, it is easier for Hong Kong traders, brand owners and designers to gain market access by partnering with Russian distributors such as nationwide retailers or chains that have extensive dispatching networks. Moreover, instead of providing designs and placing OEM orders, it is increasingly common to have Russian buyers and chain operators look for good buys among foreign collections and brands. In this regard, Hong Kong designers and brand owners would be well advised to use well-designed collections featuring decent designs and branding to capitalise on ODM and OBM opportunities, while increasing flexibility in accommodating the needs, such as small orders, of Russian importers and traders.

Aside from consumer goods, Hong Kong companies should be more attentive to Russia’s growing demand for parts and components on its road to economic diversification and localisation of consumer goods production. Given the country’s lack of component production, Russia is poised for more imports of manufacturing inputs from China. By capitalising on their role as a conductor in Sino-Russia trade and investment, Hong Kong companies can therefore benefit from the rising interest of Russian companies in sourcing quality manufacturing inputs from Asia, especially the Chinese mainland.

Also, to play a more active role in the ever-increasing demand for various commodities from the Chinese mainland, Hong Kong can act as a springboard for Russian commodities such as metals (e.g. aluminium, gold and steel), energy (e.g. oil and gas) and agricultural (e.g. timber) to further success on the mainland market. As a bridge between China and international commodities markets, Hong Kong, given its robust financial infrastructure and time zone advantage, complements New York and London to form a global network in commodities exchange transactions.

On the other hand, Hong Kong, as an important trading hub for high-tech products in Asia, maintains certain edges in the business of technology and is well poised to bring Russian and mainland partners together for technology cooperation and transfer. Of particular interest, Russia’s pressing needs of developing and adopting renewable energy, energy-saving and ICT technologies can provide plentiful room for Hong Kong to serve as a platform for Russian companies to source high-tech products and technologies from Asia, especially the Chinese mainland. In light of the increasing interest in economic cooperation between the two countries, Hong Kong can indeed serve as a service platform for Russian/mainland enterprises looking for potential investors from China/Russia to participate in various investment projects in Russia/China. Hong Kong companies can certainly assist new-to-China Russian enterprises to tap into the sizable consumer market and the vast pool of available capital on the mainland by providing a wide variety of services including business, financial and legal consultancy and support.

 

For the Press Release, please go to HKTDC News.

Content provided by Hong Kong Trade Development Council
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