How Sanctions are Affecting the Russian Market. Possible Prospects For Further Development

The change in the political situation around the world at the end of February 2022 significantly affected the economic sector of the Russian market. Most European and American brands that supported the sanctions policy against Russia closed or temporarily suspended their work within the Russian Federation, and opened, by so doing, new opportunities for their competitors from other countries that continue economic cooperation with the region.

Come to think of it, the Russian market was partially ready for this, despite the strict restrictions.

However, it's not all that simple

In spite of the fact that domestic brands have been successfully selling their products on the market, it stands to mention that most of them use raw materials imported from other, "unfriendly" for Russia, countries. And this is the case of various economic spheres.

Here's what experts from the fashion retail segment say about it in the Forbes comment: "Without the participation of foreign partners, Russian companies will not be able to provide the market with local products, since currently the main types of raw materials, accessories for the production of clothing and footwear are imported. Therefore, the clothing and footwear market is deeply import-dependent at all levels: technical equipment, fiber, threads, fabrics, production. For its functioning foreign suppliers and contractors are needed ". (Anna Lebsak-Kleimans, co-founder of the Fashion Consulting Group).

Besides, it is impossible to say with certainty that in all market areas there are domestic brands that are able to cover all demands of customers.

On the one hand, the situation seems rather critical. But on the other hand, the exit of major European brands from Russia “has opened” the doors for new companies from other countries, providing a good opportunity to outrun their European competitors.

Most of all, this issue affects the sector of fashion retail, beauty, children and home products, machines and cars (although Chinese and Korean brands are already available here and successfully selling their products).

Having analyzed the current situation, experts from RMMA marketing agency found out for which countries Russia may become a prospective market in the current situation as well as which goods and services they can successfully sell in conditions of lack of competitions with European and American brands.

China

According to the latest data, the turnover of Russian-Chinese trade in the first two months of 2022 reached $26.43 billion, having increased by almost 40% compared to the same period in 2021. Meanwhile, Russia imported goods and services from China with a total value of 12.6 billion dollars.

It is not the first year Chinese brands see significant prospects for themselves on the Russian market. Currently, machines, mechanical products, household appliances, cars and consumer goods are exported from the region. At the same time, it is difficult to predict further development of these mutually beneficial economic relations, since China has its own risks due to the sanctions imposed against Russia by other states.

What Opportunities Are There In The Russian Market For Chinese Brands?

In fact, there are quite a lot of them, since Chinese brands are present in almost all segments of the sales market. Good prospects are being opened for the very same sphere of fashion retail, beauty, housewares.

Of course, for many Chinese companies it is quite profitable to sell their products in Russia via Aliexpress. Based on the results of 2021, sales turnover in the marketplace in Russia increased by 46% (306 million rubles). However, now there is a good opportunity for them to enter the Russian market offline through their own network or a franchise agreement.

Besides, for motor manufacturers, that have been successfully selling their products in the Russian Federation for a number of years, prospects for enhancing their positions on the market emerged. If the forecasts of independent experts are to be trusted, Chinese cars will be even more in demand in Russia by the end of 2022. The remarkable thing is that even with the presence of Western competitors, this trend would be relevant to the same extent, since Russian consumers more often began to make a choice in favor of Asian companies.

Also, it should not be forgotten about Chinese brands of household appliances and smartphones that are bought by 50% of Russian consumers. Regardless of the fact that according to various sources, companies are reducing their supplies to Russia, many experts explain this situation not from a political point of view, but because of the current fluctuations of the ruble on the market. As soon as currency transactions stabilize, supplies will be increased again. Accordingly, with temporary lack of Apple and Samsung goods from this segment, Xiaomi (a favorite among Russian buyers), Huawei and Oppo have huge chances to increase their sales in Russia at least twice.

Put in other words, the Russian market for Chinese brands has been promising for a number of years with regard to the sale of goods in various segments. Especially now, when Russia is in “acute” need of new companies in the period of absence of Western and American brands on the market. This trend is a serious reason for Chinese companies to think about the implementation of their activities in Russia, as the time is more suitable than ever.

South Korea

Despite the fact that the Republic of Korea recently decided to impose sanctions on the export of certain goods to the territory of the Russian Federation, Korean brands have not stopped “seeking" to enter the Russian market. The fact is that these bans mainly affected the defense industry and the financial sector, but did not affect other promising areas in any way.

It should not be forgotten about the South Korea's automobile industry, which, despite of the sanctions policy, has not cancelled deliveries of cars to the Russian market. By the way, Kia with the restyled version of Kia Rio, as well as the Rio X cross hatchback, turned out to be the leader in sales of 2021 in this segment in Russia. Based on the results of 2021, the sales of the model on the Russian market amounted to 75,885 units. Besides Kia, such Korean models as Hundai and Genesis are successfully being sold in Russia. If you add together the sales of cars of all three companies, you will get 22.6% of the volume of the Russian car market at present.

In this regard, many representatives of the Russian auto business believe that the current market situation is a unique opportunity for Korean manufacturers to “increase” their turnover.

And Not Only Cars!

Along with the car market, opportunities have been unleashed for Korean brands in the medical and beauty fields. It is related to the fact that most cosmetology centers and beauty salons preferred products of European and American brands. But now, due to the new sanctions against Russia, the pricing policy for these products has increased significantly.

Consequently, at present many aesthetic medicine centers have an urgent concern about new brands and suppliers. According to most experts in this field, Korean cosmetics (besides a small number of domestic manufacturers) are able to replace their competitors from the USA and Europe in this beauty sector.

In addition to aesthetic medicine, dental industry may be mentioned. The point is that South Korea is among the top ten countries producing dental products and is the absolute leader in the budget segment of this market. However, only some brands are available in Russia for this sphere. Although, in fact, there are quite a lot of Korean companies engaged in the manufacture of dental implants, for instance. But they are not in demand on the Russian market yet.

In our opinion, the demand for Korean brands in Russia does not depend on sanctions and other political regulations. Korean companies will always be relevant for the Russian market, because every year they offer more and more technological and profitable solutions.

Viet Nam

Recently, the Press Service of the Complex for Economic Policy and Property and Land Matters of the Russian capital published data that the trade turnover between Moscow and Viet Nam in 2021 was 36% more than the previous year and amounted to 3.9 billion dollars. Based on these statistics, we can conclude that the Russian market is becoming more and more relevant for Vietnamese brands, even under the current sanctions policy.

Besides, the established Free Trade Area that includes reduction of rates of customs duties on certain commodity classes, protection of competition and intellectual property of exporters, contribute to the development of export and import between Russia and Viet Nam.

In our opinion, the most important development prospect for Vietnamese brands on the Russian market is the sale of food products, since many European and American companies in this segment have suspended their work. We are talking about corporations such as Valio, PepsiCo, Coca-Cola Company and, possibly, Danone, which suspended all investment projects within the Russian Federation.

According to statistics , in Viet Nam there are food brands that produce meat byproducts, chocolate and other confectionery products, as well as a huge share of the market falls on dairy baby food. It should be mentioned that in this sector there is already available Vietnamese Company Vinamilk, that has been successfully selling dairy products within the Russian Federation since 2020.

Put it in other words, there is already a case for the promotion of Vietnamese food products in the Russian Federation. The point is how quickly brands from this region will orient themselves and make a constructive solution to act as Vinamilk in Russia with consideration to the lack of large competing companies nowadays.

And Tourism!

And, of course, when it comes to Viet Nam, you can't help but mention the prospects of the tourism sector.

In addition to the visa-free regime for Russian citizens, at the beginning of 2022, the Vietnamese government lifted a number of restrictions related to COVID-19. Since January, 27, of this year, travel to Vietnam is allowed not only to vaccinated tourists (moreover, the Russian vaccine “Sputnik V” is included in the list of approved ones in the region), but to Russian citizens who had the disease and have an official certificate.

All this suggests that in the near future Viet Nam will become one of the most popular tourist destinations for Russian citizens, while most other countries have temporarily stopped air communication with Russia. This means that a rather promising period is beginning for Vietnamese tour operators to attract Russian tourists after a long quarantine in the region.

India

Despite the pressure from the “Western world", India has not stopped cooperating with Russia in regard to export and import. The Indian government explained this position by the fact that the imposition of sanctions against the Russian Federation will not lead to the settlement of the political conflict, but will only aggravate the level of international relations.

Currently, there are no obstacles for Indian brands to “expand” their interests on the Russian market. And in fact, there is definitely a room for improvement for them.

Promising Pharmaceutics

Perhaps, the most promising trend on the Russian market for Indian companies is the pharmaceutical sector. It should be mentioned that India ranks No. 3 in the world in the manufacture of these products and is a leading manufacturer of vaccines in the world. Of course, "Western” funds represent the bulk of investment in Indian pharmaceutical production. But this does not prevent brands from this sector from cooperating with other countries, including Russia.

For example, at the beginning of 2022, the Russian holding Binnopharm Group agreed to purchase the rights to the drugs Ciprolet and Levolet from the Indian brand “Dr. Reddy's” for their sale in Russia, Belarus and Uzbekistan. According to representatives of the companies, the deal is mutually beneficial for both sides, since “Dr. Reddy’s” wants to repurpose its activities and give up the production of antibacterial drugs. On the other hand, for Binnopharm Group and Russian pharmaceuticals, Ciprolet and Levolet, developed with the support of Indian colleagues, are necessary in this sector, since they are aimed at treating many types of infections.

This example shows that prospects for development are always open for Indian pharmaceutical brands on the Russian market. Moreover, many domestic companies are ready to cooperate and develop new types of pharmaceutical products together with foreign colleagues.

Recent Development Prospects

In recent years, Indian manufacturers have achieved good results in various economic spheres.

This is the case in a greater degree of the automobile industry. According to Russian experts, following the Chinese and Korean brands, Indian car manufacturers can fill this niche on the Russian market, since many of them have already entered mass manufacture of their products. For example, in 2022, India is expected to update the car lines of such large concerns as Mahindra and Maruti.

In addition to the automotive sector, India has achieved significant success in smartphone production. Most recently, the Lava brand has released the X2 smartphone, which is very likely to appear on the Russian market this year and become a good alternative for buyers in the budget segment (approximate cost is 9,000 rubles). It should be added that when creating this model, the company relied on its own developments, so the products can never be restricted in export to Russia. The point is to what extent Lava considers it promising to set up sales channels in other countries.

In other words, Indian brands have a good chance "to enter" the Russian market in 2022. Since some companies have been successfully cooperating with manufacturers in Russia for a long time, while others have reached a certain level of development in order to present their products on international markets.

Turkey

According to the Federal Customs Service, in 2021, the trade turnover between Russia and Turkey increased by 57% compared to the previous 2020 and amounted to $ 33.025 billion. Most likely, this is still far from the limit for the market economy of both countries, since the Turkish government has no plans to terminate mutually beneficial relations with Russia.

In turn, the Russian market, especially the fashion retail sector, needs new brands to be appeared more than ever. Since most European and American companies have closed their stores in the Russian Federation, this niche is only partially filled by domestic brands and Chinese manufacturers.

Besides, Russian companies are operating on imported raw materials. Therefore, Turkey, as a developed exporter in this market segment, is able to “replenish” most of the needs of fashion retail.

It should be mentioned that Turkish brands have been successfully present on the domestic market for a long time. A good example is the Flo concern, which opened its own representative office in Russia and launched 5 shoe brands on the Russian market in 2021. However, the company does not think to stop there and intends to launch another Nine West franchise project within the Russian Federation in the near future.

When it comes to clothing, the goods of the Turkish companies LC Waikiki, Koton and Colin's are also represented on the Russian market. For obvious reasons, currently these brands have significant increase in sales, since almost the entire mass market audience “switched” to them when European goods were missing.

But This Is Not The Limit For Development!

Bulat Shakirov, President of the Union of Shopping Centers, said that in the near future even more Turkish and Chinese brands may appear in the shopping center due to the fact that there is a great risk of increasing vacant retail spaces by 30-40%. Representatives of the Union have already started negotiations with Turkey, where, according to their data, there are more than 200 brands that will also be in demand among Russian buyers.

In other words, the potential of Turkish companies in the field of fashion retail is quite large, as well as the prospects for their appearance on the practically uncompetitive Russian market.

In Conclusion

The year 2022 will go down in history as one of the most ambiguous periods for the market economy in Russia.

The exit of most Western brands have entailed not only negative consequences, but also “opened” many profitable directions for companies from other world regions. And the sooner new brands appear on the Russian market, the more chances they will have to win a potential audience in the shortest possible time.

However, we should not forget that entering a new market, even in the absence of a competitive environment, is always a serious step that requires planning and preparation.

If you are thinking about Russia as a promising direction for business development, entrust this task to RMAA agency professionals who know all the peculiarities of marketing tools to attract the right audience on the Russian market.