0203 696 0980

An overview of Russia's social, political and economic environment

System of Government: Federal semi-presidential republic, which has its legal basis in the Constitution of the Russian Federation and the federal constitutional law ‘On the Government of the Russian Federation’

Current president: Vladimir Putin

Elections: Presidential elections are held every 6 years, and the next presidential elections in Russia will take place in 2018. Presidents are directly and anonymously elected by Russian citizens, and a presidential candidate will be elected if he gains an absolute majority of votes, i.e. 50%+.

Overview

The Russian Federation has been a hotbed of political activity, criticism and controversy in recent months, capturing the attention of the international media and the marked hesitancy of foreign retailers looking to expand into the nation. Prominent UK retailer, New Look, withdrew from Russia and Ukraine in late 2014 amidst fears over the nations’ political stability, and many others have followed suit. This tenuous atmosphere and retail retreat have provoked reluctance within the retail community; is this the time to take advantage of Russia’s vast ecommerce potential or will the stumbling blocks outweigh the opportunity?

Recent & upcoming major political/economic events

The official rejection of the initiative to change threshold limits for duty-free trade. It had been anticipated that from January 2015, a new, lower, duty-free threshold would be put in place on imports into the Russian Federation, ultimately negatively impacting many foreign distance selling companies. At the date of publication of this Passport, the threshold of €1,000 PCM remains in force (see Customs Clearance Procedures).

As of 1 July 2015, the cities of Moscow, St Petersburg and Sevastopol are anticipated to have an additional trading fee imposed for traders who operate in stationary trade facilities. After this date, this trading fee may be imposed in additional municipalities.

Government interference in business

Russia is a territory notorious in reputation for the level of governmental regulation and red tape that accompany business transactions, and it is undeniable that the Russian Government exercises strict control over commercial procedure and infrastructure, as well as the economy at large. Natural monopolies, for example, are severely restricted through legislation and government bodies, in particular the Federal Antimonopoly Service (FAS). Forbes magazine, in its ninth annual ranking of the Best Counties for Business in 2014, allocated Russia 91st out of 146 countries for its business environment, and 30th for government interference in business. It is easy to see why Russia’s business environment might not be perceived to be particularly inviting for a foreign e-Retailer into the territory.

Russia’s recent macroeconomic policies, however, suggest future progress in this area, and long-term initiatives have been put in place with the aim of creating a nurturing and progressive environment for international and domestic enterprise. Advancement in this area is therefore eagerly anticipated for coming years; organisations can expect to see the lessening of government supervision of businesses, as well as a reduction in administrative hurdles related to day-to-day practice. Plans additionally include the unification of the regulatory powers of State authorities.

These goals, as embodied in Federal Law No. 294 of 26 December 2008, evidence commitment on the part of the Russian legislature to provide a legal basis for the protection of businesses from excessive administrative pressure and regulatory control. The Law is progressive, and foresees greater equality in the official inspection of businesses (including the transparency of information), and remedies for businesses are available where impartiality is demonstrated.

Over the next few years, a goal of the National Association of Mail Order and Distance Selling Trade is the establishment of a State programme aimed at Russian distance selling development. Unfortunately, however, despite goods intentions, actions of Russian authorities are still somewhat uncoordinated and inefficient and - whilst ministries and departments are trying to launch several stimulating programmes for business development - difficulties are complex and must be solved systematically. It is possible that focus on schemes to nurture enterprise and promote investment will be lower on the Government’s agenda whilst Russia is in the midst of international dispute and domestic crisis.

Overall, it is well-acknowledged amongst Russian authorities that the territory’s regulatory and supervisory practices require improvement, and in some areas are archaic. There are additionally important steps to be taken with regard to the cultivation of commercial enterprise. As indicated above, however, reform and public discussion are underway, and approaches are likely to change as tensions reduce. Coming practices in this area will likely be a compromise between the interests of the Russian Government, businesses and citizens.

As mentioned elsewhere in this Passport, the administrative procedures and regulations applicable to foreign legal entities trading in Russia differ to those applicable to domestically incorporated bodies, though a foreign company choosing to establish a Russian legal entity will be subject to the same standards and requirements as its Russian counterparts. For distance sellers looking to expand into the Russian market, it is important to note that there are minimal differences in the level of official intervention and regulation between domestic and foreign retailers.

Socio demographics

Extensive socio-economic change has swept across the Russian Federation in recent decades, a seemingly inevitable result of the evolution of economic policy in the territory. Economic liberalisation has been labelled a priority, and the results of this ideological shift are marked. An increase in privatisation of State-run enterprise, a growing consumer market and a shift from a centrally-planned economy to a market-based system are all notable movements.

Such changes in the macroeconomic direction of the Russian Federation have resulted in an increase in social mobility. Employment rates in the private sector have increased, and entrepreneurship - at least in some regions of Russia -has thrived. Ultimately, the structure of Russian society is becoming less rigid, and this greater flexibility has achieved some impressive public results.

 

Employment and wage

A low rate of unemployment in the Russian Federation has been one of the signature economic achievements of the last 15 years. As would be expected, however, the economic crisis in the territory is taking its toll on the labour force. Though in January 2015 the unemployment rate in Russia had decreased year-on-year by 2.1%, month-on-month the picture is far less positive. The FSSS reports that between December 2014 and January 2015, unemployment in the Russian Federation increased by 3%, reaching 4,176 million people, or around 5.5% of the economically active population. By February 2015, this rate had increased to 5.8%. Unemployment rates are likely to continue to increase as Russian financial difficulties set in.

The national minimum wage in the Russian Federation from January 2015, as approved by Federal Law No. 408-FZ of 1 December 2014, amounts to RUB 5,965 per calendar month (around USD 101 as of March 2015), though individual regions of Russia do have the ability to set the minimum wage in their particular territory. For example, in the Moscow region the minimum wage is set at RUB 9,000 PCM, whereas in Moscow itself the minimum wage is set at RUB 12,200. The Krasnodar territory has enacted a minimum wage of RUB 6,469 PCM, and in St. Petersburg the minimum wage is set at RUB 8,326.

The table below demonstrates national minimum wage changes between 2009 and 2015 in the Russian Federation.

It is important to note here that, as is the case with most nations, minimum wage rates in Russia differ greatly from average reported wages in the country, which represent a far higher purchasing power amongst the population at large. According to the FSSS, whilst State employees are the best paid workers in Russia with an average salary of around RUB 250,000 (USD 4,040) per month, the overall average salary in Russia is RUB 32,800 (USD 530 by early March 2015 exchange rates; before the Ukrainian-Russian crisis this stood at around USD 1,000) per calendar month.

A survey conducted by the Russian Public Opinion Research Centre (VTsIOM) in February 2015 reported that a third of Russians expect salary cuts in the next three months, whilst a quarter fear they or their family members will be laid off. In addition to that, Russia currently suffers from the biggest drop in consumption in over two decades due to the ruble’s 40% loss against the US dollar in just half a year.

Some hope for the short-term

At present, the political and economic landscape in Russia is unquestionably tense, and - despite prompt action on the part of Russian authorities - the atmosphere in the territory won’t change overnight. Any retailer would be right to exercise caution in making the decision to enter this tumultuous marketplace.

However, whilst the economic recession in Russia has unquestionably made this market a complex choice for an e-Retailer at present, this financial cloud certainly has a silver lining for international retailers into the territory. Though the fall in value of the ruble and associated increase in exchange rates have made foreign products more expensive for Russian consumers to purchase, many costs of broaching the Russian digital market have correspondingly decreased for a foreign e-Retailer. Web development, localization, PPC and SEO –amongst other things –are all offered in rubles by Russian companies, and these services now cost a fraction of their former price for international companies. What’s more, PPC rates have dropped even in RUB prices as competition in the market has decreased. Those who make timely use of these opportunities to establish a presence in the Russian marketplace will likely reap the benefits of expansion once the Russian economy has stabilised. After all, prior to the financial crisis, Russia’s personal consumption levels led the BRIC countries, with 60% of pre-tax income being spent on shopping - the highest rate in Europe.

Overall, though some ecommerce companies have reported their sales volumes stagnating or decreasing as a result of the economic downturn in Russia - a trend which might continue in the short-term - experts forecast that impressive ecommerce growth will resume after the crisis. It is, after all, undeniable that the full potential of the Russian ecommerce market is yet to be tapped. As highlighted elsewhere in this Passport, in the middle and long term, growth will be fuelled by:

Growing broadband and ecommerce penetration in Russia’s regions;

The increased knowledge and use of a variety of digital payments methods;

The Russian fulfilment infrastructure reaching maturity. With reduced delivery costs, the scope of ecommerce in Russia will extend to cheaper product categories and will be made a viable option even to small cities and remote areas.

 

 

 

Demographics

Online and mobile usage

Online shopping behaviour

Marketing

Payment methods

Taxation

Legal framework

Logistics and communications

Customs clearence procedures