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An overview of logisitcs and communication in Russia

Overview

One of the more frequently cited concerns amongst international e-Retailers looking to expand into Russia centres around the physical delivery of remotely purchased goods to Russian consumers. Russia certainly boasts a force to be reckoned with, even when it is only its sheer expanse being taken into account. A population of 143.7 million people spread across a surface area of 17,075,000 km2 presents a daunting task both in time and expense, particularly when 11 time zones, two continents, and a diverse range of consumer expectations for delivery are adding to an e-Merchant’s complications. Russia is the largest country in the world, its European and Asian portions individually still dramatically outranking their continental counterparts in size.

In 2014, the World Bank allocated Russia 90th place out of 160 countries in its International Logistics Performance Index, a relatively poor score even when a surface area the size of Pluto is taken into account. The ranking - which includes customs, infrastructure, international shipment, logistical competence, tracking & tracing and timeliness - certainly reflects Russia’s overall status as a nation whose ecommerce market is still in its infancy, though it is important to note that it is developing quickly. Progress is aided by the fact that many regions of Russia have excellent access to sea, road and rail routes, and the territory is home to several major airports. The spectacular growth of Russian ecommerce has created increased demand for suitable B2C logistics providers -not in the least as an alternative to the Russian Post. At a minimum, an e-Retailer should scope out a suitable partner who can effectively cope with Russia’s vast distances and climate and temperature changes.

140 million parcels were delivered in Russia in 2014 alone and, of these, roughly half were despatches from foreign distance selling companies. For the majority of international retailers, selling into Russia is a primary priority, but the reasons behind a general retail hesitancy to broach this market are immediately apparent. How does one go about overcoming these logistical hurdles?

General delivery considerations

Shipping costs within the Russian Federation can be noticeably higher than those encountered in Western Europe, largely due to the reality that goods must often be transported over long distances. Where goods are made available for purchase in the Far East of Russia, they must almost exclusively be delivered by airfreight, and temperature-proof packaging will in many cases be required, particularly at certain times of the year. Indeed, parts of Siberia are recorded to be some of the coldest continually inhabited places on Earth, with temperatures dropping as low as -60oC in the winter. The proper packaging of goods can thus be a major consideration whether goods are coming from overseas or from a warehouse within Russian borders.

As would be expected, the costs and timeframes associated with delivering consumer goods in Russia differ depending upon the logistics solution selected by an e-Retailer. The Russian logistics market has some key and dominating players, and one of the major Russian natural monopolies is the Russian Post. During the first six months of 2014, the most popular delivery method in the territory was courier delivery, 33% of which was carried out by the Russian Post.

Despite its market share, however, the Russian Post leaves something to be desired both in service and reputation. One of the major stumbling blocks identified with the Russian delivery system as a whole is the immaturity of the working process of the Russian Post, which does not meet world service and delivery time standards despite being one of the more popular logistics solutions. Problems surrounding the Russian Post include:

The typical transit time for Russian Post delivery is between 10 and 14 days. However, deliveries to remote areas usually take much longer, and cross-border shipments can even take months;

Some parcels are lost or even stolen. The situation, however, has improved over the past few years, with industry association NAMO reporting that less than 1% of parcels were so affected in 2014;

The system of recipient notification employed by the Russian Post is considered deficient. Whilst the Russian Post offers a tracked service, there is manual handover required and visibility can be lost. Where a customer is not home to receive a package, the Post is supposed to leave a notification in the recipient’s mailbox evidencing the attempted delivery. However, many mailboxes in Russia are broken or inaccessible, and it is reported that postmen do not always leave these notifications. Many parcels thus end up returned to the merchant with the customer never being informed about the attempted delivery;

The Russian Post’s system is also hampered by long lines at post offices to collect parcels. A 2012 study reported that half of recipients surveyed spent 30 minutes or more on average waiting to collect goods in these locations;

The Post has raised its delivery rates over the past few years, whilst alternative providers have lowered theirs to compete competitively;

The Russian Post additionally charges a fee for ‘storage service’; an additional expense that must be paid if a parcel is not picked up from a post office within a few days. Storage time is additionally not tracked efficiently, and many parcels are returned to the sender before the standard storage time expires.

Importantly, despite its reputation for slow speeds, lack of reliability and high costs, the Russian Post does offer the greatest level of territorial coverage in the Russian Federation. Additionally, although there’s a perception of unreliable end-carrier postal service as a whole in Russia, in actuality the fulfilment levels are relatively high.

Although historically alternative logistics providers in Russia had been somewhat unappealing as viable delivery options for distance sellers, this area of industry has developed impressively in recent years, undergoing competitive modernisation. Indeed, in 2012, of the 108 million packages shipped across Russia, half were shipped by alternative companies to the Russian Post network. A variety of new providers have appeared on the market, offering a higher quality of service and shorter delivery times to large and mid-sized cities than those offered by the Russian Post. Fees charged for the use of such services - which used to be significantly higher than those charged by the Russian Post - now tend to be competitive, though it is important to note that they are by no means negligible. The Russian Post’s offering has thus become less popular in those areas that are also covered by its competitors.

One alternative commercial end-carrier operating in the Russian Federation is certainly worthy of note here. SPSR covers deliveries to around 98% of the Russian population, and the remaining 2% is serviced by EMS, the premium service of the Russian Post (though, impressively this 2% of the Russian population is spread around roughly 30% of Russia’s landmass). SPSR offers competitive delivery times and enhanced parcel tracking mechanisms to its consumers, as well as up to three delivery attempts in total. After an initial failed delivery attempt, a calling card will be left at the specified delivery location, explaining the process for re-arranging delivery or picking up the parcel from a customer’s local SPSR office.

Domestic players by no means saturate the Russian logistics market; many international Western companies have recognised a high demand for a qualitative delivery service in the country, and have expanded their offerings to include the Russian market as a result. Importantly, however, many third-party carriers into Russia have recently pulled out due to changes in import laws, which can cause a logistical headache for these suppliers. Over recent years, the documentation required for ecommerce imports into Russia has increased dramatically and now includes proof of product value and bankcard ownership. This requirement for the presentation of bankcard documentation at customs, in particular, has caused problems for carriers.

The below graphic, provided by international ecommerce delivery partner, wnDirect, shows typical delivery transit times between the UK and the Russian Federation.

Making the best choice for your business

Russia as it exists today only has 25 years of experience in international economic activities ; the practices currently in place have evolved quickly since the dismantling of the Soviet Government. As the years go by, the Russian system is moving increasingly close to becoming aligned with European practice.

If an e-Merchant is selling or has plans to sell only limited stock in the Russian Federation, it is usually the case that he will contract to export with an express carrier that has a presence in the location. It is a relatively simple process and typically significant support is offered by the third-party. What’s more, the express carrier can easily communicate with a consumer in the event of a problem or delay.

Importantly, however, it can make sense for an e-Retailer to change his delivery strategies with the aim of optimising his expenses once he achieves a certain volume of Russian sales. Should order volumes justify it, the next logical step can be for an e-Retailer to expand his presence within the Russian market, optimising not only his expenses but also those of his customers.

A physical presence in Russia allows for cheaper delivery, more favourable returns options and shorter delivery times. Establishing a physical presence in the country can take place in a variety of ways, and some popular methods with regard to logistics are set out below.

1. A retailer can set up a warehouse in Russia in which to store his products. This cuts down on lengthy international delivery times and avoids the cost and procedure associated with shipping individual units through customs. Should he choose this option, an international retailer should ship his items to the Russian Federation in bulk, though in this case a range of separate complications and considerations arise. This option - of course - doesn’t make financial sense if only small quantities are being exported cross-border, as the costs will outweigh the benefits. A retailer can also contract with a third-party warehouse within Russian borders, which bypasses the need to set up a Russian legal entity.

2. Manufacturing facilities can also be established within Russia if consumer demand grows to this level, though the precise details of this are beyond the scope of this Passport. Should resources allow, an e-Retailer into Russia additionally has the option of investing in his own logistics system across the territory. Many pure play online retailers such as Enter.ru, Lamoda.ru and Ozon.ru have deployed their own warehousing and delivery processing facilities and others, such as multi-channel retailers Otto and Svyaznoy, have developed existing logistics systems to serve the growing needs of their ecommerce branches.

Ozon, colloquially known as the Russian Amazon, is a good example of a company that has developed its own, complete logistics network. Indeed, the relutance of Russian consumers to make online payments has required Ozon and many others to invest in company-owned fleets of delivery trucks to deliver goods, from which the drivers then typically collect payment on delivery. The company KupiVIP takes this a step further, waiting until the customer has checked his purchases and, where necessary, taking the goods back if they are rejected.

An online retailer looking to target Russian consumers should ultimately take note of how similarly-placed companies organise their internal Russian delivery infrastructures, and attempt to adapt to this market accordingly. Establishing a physical presence in Russia can be game-changing for an international e-Retailer into the territory; the associated logistical advantages can give a retailer a much-needed edge against his competitors, and mean the difference between Russian consumers buying from an intentional e-Shop or abandoning his basket in favour of cheaper, local options.

Russia’s more remote regions

It is no secret that the problems associated with delivery in the Russian Federation are greatly exacerbated when it comes to delivering goods to Russia’s more remote regions –areas which consist of all locations not covered by the underground zones of Moscow and St. Petersburg.

On the whole, the further away from these ‘capitals’ a customer lives, the more likely it is that an e-Retailer and/or their delivery partners will have to contend with ailing road and rail infrastructures, as well as a host of other problems often related to weather condition and temperature. Fortunately, however, consumer expectations for delivery in the regions of Russia do not directly correspond to those of their counterparts in these capitals; Russians outside of Moscow and St. Petersburg are willing to wait extra days or weeks for their deliveries, though it is important to note that as infrastructure improves and delivery options expand, their patience and flexibility is sure to decrease.

As has been noted elsewhere in this Passport, whilst historically the highest volume of ecommerce orders have come from e-Shoppers living in Moscow or St. Petersburg, this is now starting to change and the regions are coming out on top. Adapting delivery options to cater for these areas is therefore highly recommended.

The future of logistics in Russia

At the outset of Russia’s ecommerce development, many of the main problems encountered by e-Merchants looking to target Russian consumers were logistical; potential consumers are widely distributed across the regions, and Russia’s historical reputation for delivery quality has been poor. Though many problems have been partially solved thanks to the ever-increasing infrastructural development of the logistics service in and to Russia, still the service leaves much to be desired. Even if potential consumers are eager to buy something in a particular online shop, if delivery is not offered to his particular location –which it frequently isn’t - a high bounce rate amongst Russian consumers can be an all-too-often encountered occurrence.

Overall, the Russian Federation is still only at the beginning of its distance selling market development, though increases in ecommerce activity are swiftly driving improvements forward. Only in Moscow, St Petersburg and other cities with a population of one million+ dwellers are logistical infrastructures at - or at least approaching - world standards. As we have seen, however, the more remote regions of Russia will now be the centre of the nation’s ecommerce growth and development. Here the offline, bricks and mortar shopping options are characterized by poor development, and more and more consumers are turning towards e-Shopping and other forms of distance selling for their retail needs. To truly cater to these more remote consumers, as well as facilitate delivery standards on par with Russia’s larger cities and developed markets around the world, however, there is still much work to be done. Delivery times will have to be further cut, as will costs. What is clear is that improvement is certainly on the agenda of the industry’s solutions providers. The Russian Post and increasingly more non-state postal operators are reducing their delivery tariffs and investing in their internal infrastructures, and competition in the sector is growing. Such actions are necessary to nurture the growth of ecommerce in this vast territory.

 

 

Demographics

Political, social and economic environment

Online and mobile usage

Online shopping behaviour

Marketing

Payment methods

Taxation

Legal framework

Customs clearence procedures

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