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Russia's consumer goods
boom
By Jayanthi Iyengar
NEW
DELHI - The SARS (severe acute respiratory syndrome)
epidemic in China had revved up hope here that orders in
textiles and other sectors would be diverted to India.
But that may not happen. A new contender for foreign
direct investment (FDI) could be Russia, a country whose
president, Vladimir Putin, confessed in his Council of
Federation address in 2001, "The problems haven't gone
away," and extolled the Russian people, "No one is our
enemy in today's world, yet no one is especially waiting
for us out there, either. We must struggle for our place
under the sun of economy."
Russia set ambitious
targets for higher rates of growth at that point, and
committed itself to a deep restructuring of its economy,
whose main plank was the creation of an enabling
environment for investments, foreign and domestic. The
steps taken then, combined with the structural changes
to the underlying superstructure, are beginning to yield
results today. If independent experts such as the
Moscow-based Interactive Research (IR) group are to be
believed, it has resulted in the creation of a pulsating
domestic consumer-goods segment, creating new
opportunities for investors and the domestic
entrepreneurial class alike.
If one looks at the
decade gone by, oil profits were and still are the
life-blood of the Russian economy. This is best
exemplified by the US$6.75 billion deal between BP and
Tyumen Oil, considered to be not only the deal of the
decade but also the largest since the fall of the Soviet
Union. The part cash, part share-swap deal created one
of the largest oil conglomerates in the world, but it
has also resulted in the dawning realization that Russia
cannot indefinitely depend on oil for growth, leaving
its economy open to shocks from oil-price volatility. As
Steven Dashevsky, oil and gas analyst at Aton brokerage,
told Johnson's Russia List, "The oil and gas industry
was the locomotive that pulled Russia out of the mire,
but going forward it will have to be domestic
consumption that drives it."
Interestingly,
because the general focus has been on oil and the
concomitant problems arising from Russia's
over-dependence on it, most casual observers have missed
a new trend that lies hidden under the grand canopy of
the oil economy, says the IR group. This is the
emergence of a new entrepreneurial class, different from
the already known and listed companies, such as Baltika,
Wimm-Bill-Dan and MTS. They are the companies of the
future, the vehicles for domestic growth, and the fodder
for future global acquisitions and alliances by global
majors.
Significantly, these companies are in
consumer goods, a segment that until now had been
considered unimportant. And if the IR group's
projections are right, there could be a whale of
opportunities for overseas investors.
In a
report released last December as well as in a new study
just released titled "Top 100 Emerging Companies of the
Russian Consumer Market", the group argues that contrary
to public perception, the Russian economy is not as
dependent on oil as is perceived and the country's
nominal gross domestic product (GDP) is about $450
billion to $500 billion, about 40 percent higher than
official estimates. The consumer economy is four times
the official estimates of its size. Less than 20 percent
of Russian consumer spending goes into the consumption
of imported goods and the country's consumer market
could be 2.5 times its exports. Further, consumer
incomes are growing at about 8.5 percent annually (2002
figures) and the consumer goods segment, worth $260
billion to $270 billion by the group's estimates, is
growing at a healthy 13-13.5 percent.
Further,
the group paints a glowing picture of a growing middle
class (about 30 percent of Russia's 140 million
population), defined as those who spend more than 35-40
percent of their income on essential commodities and who
have incomes to spend on consumer durables, education
and health services. Predictably, this population is
concentrated more around Moscow and less in the
interior. This explains why more than 30 percent of the
top 100 emerging consumer-goods companies are
concentrated in Moscow and St Petersburg. The group
points out that the share of middle-class disposable
incomes is growing. Further, this growth is increasingly
in services and consumer non-durables, and not merely
food.
The report admits that income disparities
are high in Russia, with the bulk of consumer spending
falling in the 20th percentile of the population.
However, what is not widely known is that Russian
individual incomes are subject to low rates of taxes and
that Russians do not have to pay large sums in
electricity, gas and water bills. Most Russians own
their apartments and do not carry heavy liabilities in
terms of debt and mortgage payments.
Further,
the IR group offers a list of 100 companies it calls
"tomorrow's [consumer goods] companies identified
today". This list excludes the oil majors. It also
excludes the known and listed companies as well as those
that have undergone foreign acquisition. This leaves a
list of relatively unknown consumer-goods companies in
such diverse fields as meat processing,
semi-manufacture, tea, coffee and other foods, ketchup,
sauces, cosmetics, perfumery, bakery, pharmaceuticals,
textiles, clothes, consumer electronics, building
materials, packing, printing, financial services,
travel, wholesale distribution and retail trade.
Under meat processing the group lists promising
names such as Compomos, Mikoyan, Klinsky, Omsky Bacon
and Parnas-M. In the category of ketchup, edible oil,
margarine and fats, there are names such as Efko,
Baltimor, Nizhegorodsky MZHK and Petrosoyuz. In
textiles, names such as Russian Textiles, Gloria Jeans
and Tchaikovsky Textiles figure on the list. For
furniture, there's Shatura, and for electronics,
Aquarius and Formoza. Promising distributors include
Rusimport and retailers include Kopeyka. In financial
services there's Russian Standard Bank and Alfa Bank
among others. And on tourism and transport figure
Siberian Airlines and Natalie Tours.
What is
interesting about the IR group's report is that though
it is at variance with the general perception of Russia,
early entrants to the economy could reap benefits of the
early-bird incentive in case the group's estimates are
correct. Besides, the group's study, focused entirely on
the consumer-goods segment, is one of a kind, with no
other comparable studies available. Perhaps this focused
approach has helped the consultant group discover
underlying trends in the Russian economy that have thus
far escaped most studies, most of which have adopted a
blanket approach to classification of companies. Thus,
while there are reports identifying the top 100 Russian
companies, there are none identifying them in the
consumer-goods segment.
To understand what is
happening in Russia, one needs to look at the country's
development map during the decade gone by. The early
1990s saw the domination of the economy by large
state-owned enterprises in the core sector, particularly
heavy industries, and a slew of low-quality, high-volume
consumer-goods manufacturers. The concentration on what
the state considered "essential" led to a demand spiral
for so-called "luxuries", resulting in long queues
outside government-run distributors of these products.
All this changed with the disintegration of the
Soviet Union. The transition saw the creation of a new
economy fueled by "shuttle trade", or the illegal import
and distribution of computers, alcohol, sports wear and
a load of other consumer goods by the bagful from China,
Turkey and Poland. The shuttle trade resulted in the
creation of many of Russia's modern-day tycoons, but it
stunted the growth of domestic industry.
Against
this background, Russia witnessed a financial crisis in
August 1998. This crisis undermined the Russian banking
system, cut consumer incomes and led to the devaluation
of the ruble. However, it also proved to be a blessing
in disguise, as it kicked off the debate in Russia on
structural reforms. The year 1999 saw the Institute of
Economics, Russian Academy of Sciences, circulate the
country's first-ever discussion paper on a long-term
strategy of social-economic development up to the year
2015. Until then, there had been no move to evolve a
long-term strategy even at the government level in the
new era.
At the micro level, the financial
crisis of mid-1998 also had another positive fallout.
The devaluation of the ruble made imports unattractive.
This spurred demand for cheaper domestic consumer goods,
resulting in the development of a vibrant domestic
consumer-goods industry, under the grand canopy of the
known oil conglomerates. It is this growth that is now
being captured by experts such as the IR group.
(Copyright 2003 Asia Times Online Co, Ltd. All
rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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