The Impact of Sanctions on the Russian Market and Potential Future Outlook
The global political landscape experienced significant shifts towards the end of February 2022, leaving a lasting impact on the Russian market’s economic sector. Many European and American brands, which had supported the imposition of sanctions against Russia, either closed their operations or temporarily suspended their activities within the Russian Federation. This development opened up new avenues for competitors from other countries that continued their economic cooperation with the region.
Interestingly, the Russian market had partially prepared itself for such a scenario, despite the stringent restrictions it faced. However, the situation is not without its complexities. While domestic brands have successfully been selling their products, it is important to note that most of them rely on imported raw materials from countries considered “unfriendly” towards Russia. This holds true across various economic spheres.
Experts from the fashion retail segment, as mentioned in a Forbes comment, highlight this concern: “Russian companies will struggle to meet the market’s demand for local products without the participation of foreign partners, as the primary raw materials and accessories for clothing and footwear production are currently imported. Therefore, the clothing and footwear market is heavily reliant on imports, including technical equipment, fibers, threads, fabrics, and production. Foreign suppliers and contractors are crucial for its functioning” (Anna Lebsak-Kleimans, co-founder of the Fashion Consulting Group).
Additionally, it cannot be definitively stated that domestic brands in all market sectors are capable of meeting all customer demands. On one hand, the situation appears quite critical. However, on the other hand, the departure of major European brands from Russia has opened doors for new companies from other countries, presenting them with a valuable opportunity to outpace their European competitors.
The sectors most affected by this issue include fashion retail, beauty, children and home products, machinery, and automobiles (although Chinese and Korean brands are already present and successfully selling their products).
Through a thorough analysis of the current situation, experts from the QB marketing agency have identified countries that may view Russia as a prospective market in the current scenario. They have also identified specific goods and services that these countries can successfully sell in the absence of competition from European and American brands.
Opportunities for Chinese Brands in the Russian Market
According to the latest data, Russian-Chinese trade turnover in the first two months of 2022 reached $26.43 billion, showing an impressive 40% increase compared to the same period in 2021. Russia imported goods and services from China with a total value of $12.6 billion during this time.
Chinese brands have been eyeing the Russian market for several years, recognizing the significant prospects it offers. Currently, the region exports machinery, mechanical products, household appliances, cars, and consumer goods. However, the future development of these mutually beneficial economic relations remains uncertain due to the sanctions imposed against Russia by other states, posing risks for China.
Nevertheless, there are numerous opportunities in the Russian market for Chinese brands, as they are present in almost all sales segments. Promising prospects can be found in fashion retail, beauty, and housewares.
While many Chinese companies find it profitable to sell their products in Russia through platforms like Aliexpress, there is now a great opportunity for them to enter the Russian market offline, either through their own network or via franchise agreements.
Furthermore, Chinese automakers, who have been successfully selling their products in Russia for years, have a chance to enhance their market positions. Independent experts forecast an increased demand for Chinese cars in Russia by the end of 2022. Interestingly, this trend remains relevant even in the presence of Western competitors since Russian consumers increasingly prefer Asian companies.
In addition, Chinese brands of household appliances and smartphones should not be overlooked, as they are purchased by 50% of Russian consumers. While some sources indicate reduced supplies to Russia, many experts attribute this situation to market fluctuations rather than political factors. Once currency transactions stabilize, supplies are expected to increase again. Consequently, in the temporary absence of Apple and Samsung products, Xiaomi (a favorite among Russian buyers), Huawei, and Oppo have a significant opportunity to double their sales in Russia.
In summary, the Russian market has been promising for Chinese brands in various segments for a number of years, especially now when Western and American brands are absent. This trend provides a compelling reason for Chinese companies to consider expanding their operations in Russia, as the timing has never been more favorable.
Opportunities for Korean Brands in the Russian Market
Despite recent sanctions imposed by the Republic of Korea on the export of certain goods to Russia, Korean brands have continued their efforts to enter the Russian market. These sanctions primarily targeted the defense industry and financial sector, leaving other promising areas unaffected.
The South Korean automobile industry, for example, has not halted deliveries of cars to the Russian market despite the sanctions policy. Kia, with its restyled version of the Kia Rio and the Rio X cross hatchback, emerged as the sales leader in the segment in Russia in 2021. Sales of the Kia Rio model alone amounted to 75,885 units in 2021. Alongside Kia, other Korean brands such as Hyundai and Genesis have also found success in the Russian market. Collectively, the sales of cars from these three companies currently account for 22.6% of the Russian car market.
In this context, many representatives of the Russian automotive business see the current market situation as a unique opportunity for Korean manufacturers to expand their turnover.
However, it’s not just the car market where opportunities exist for Korean brands. The medical and beauty sectors have also opened up new possibilities. Previously, cosmetology centers and beauty salons primarily favored products from European and American brands. However, due to the new sanctions against Russia, the pricing of these products has significantly increased.
Consequently, many aesthetic medicine centers are now actively seeking new brands and suppliers. According to experts in the field, Korean cosmetics (in addition to a few domestic manufacturers) have the potential to replace their competitors from the USA and Europe in the beauty sector.
Another area worth mentioning is the dental industry. South Korea ranks among the top ten countries in dental product manufacturing and is the leading producer in the budget segment of this market. However, only a few Korean brands are currently available in Russia in this sphere. Despite the presence of numerous Korean companies engaged in the production of dental implants, for example, they have yet to find demand in the Russian market.
In our opinion, the demand for Korean brands in Russia is not solely dependent on sanctions or other political regulations. Korean companies will always remain relevant in the Russian market because they consistently offer increasingly advanced and cost-effective solutions.
Opportunities for Vietnamese Brands in the Russian Market
According to recent data published by the Press Service of the Complex for Economic Policy and Property and Land Matters of Moscow, the trade turnover between Moscow and Vietnam in 2021 increased by 36% compared to the previous year, reaching $3.9 billion. These statistics indicate that the Russian market is becoming increasingly relevant for Vietnamese brands, even amidst the current sanctions policy.
Moreover, the established Free Trade Area, which includes reductions in customs duties, protection of competition, and intellectual property rights for exporters, contributes to the development of export and import between Russia and Vietnam.
In our opinion, the most significant development prospect for Vietnamese brands in the Russian market lies in the sale of food products, especially since many European and American companies in this segment have suspended their operations. Corporations such as Valio, PepsiCo, Coca-Cola, and possibly Danone have halted all investment projects within the Russian Federation.
Vietnam boasts food brands that produce meat byproducts, chocolate, confectionery products, and a significant share of the market is occupied by dairy baby food. Notably, Vietnamese company Vinamilk has been successfully selling dairy products in Russia since 2020.
In other words, there is already a case for promoting Vietnamese food products in the Russian Federation. The key lies in how quickly brands from Vietnam can orient themselves and find constructive solutions to enter the market, taking into account the current absence of major competitors.
And let’s not forget about tourism!
Vietnam holds great prospects in the tourism sector as well. With the visa-free regime for Russian citizens and the lifting of certain COVID-19 restrictions by the Vietnamese government at the beginning of 2022, travel to Vietnam is now permitted for vaccinated tourists, including those who have received the Russian vaccine “Sputnik V” which is approved in the region. Additionally, Russian citizens who have recovered from the disease and possess an official certificate are also allowed to travel to Vietnam.
These factors indicate that Vietnam is set to become one of the most sought-after tourist destinations for Russian citizens, especially considering that many other countries have temporarily suspended air travel with Russia. This creates a promising period for Vietnamese tour operators to attract Russian tourists after a prolonged period of quarantine in the region.
Opportunities for Indian Brands in the Russian Market
Despite pressure from the Western world, India continues to maintain its cooperation with Russia in terms of export and import. The Indian government justifies this stance by emphasizing that imposing sanctions on Russia will not contribute to resolving the political conflict but will only further deteriorate international relations.
Currently, there are no barriers preventing Indian brands from expanding their interests in the Russian market. In fact, there is considerable room for improvement and growth for them.
Promising Pharmaceutical Sector
The pharmaceutical sector represents the most promising trend for Indian companies in the Russian market. India is ranked third globally in pharmaceutical manufacturing and is a leading producer of vaccines. Although Western funds heavily invest in Indian pharmaceutical production, it does not hinder brands from collaborating with other countries, including Russia.
For instance, at the beginning of 2022, the Russian holding company Binnopharm Group agreed to acquire the rights to the drugs Ciprolet and Levolet from the Indian brand “Dr. Reddy’s” for sale in Russia, Belarus, and Uzbekistan. According to company representatives, this deal is mutually beneficial since “Dr. Reddy’s” aims to refocus its activities away from antibacterial drug production. On the other hand, Ciprolet and Levolet, developed with the support of Indian colleagues, are essential for Binnopharm Group and the Russian pharmaceutical industry as they target the treatment of various infections.
This example demonstrates that Indian pharmaceutical brands always have prospects for development in the Russian market. Furthermore, many domestic companies are ready to collaborate and innovate in the production of new pharmaceutical products alongside their foreign counterparts.
Recent Developments and Prospects
In recent years, Indian manufacturers have achieved notable success in various economic sectors.
The automotive industry, in particular, holds great potential. According to Russian experts, following Chinese and Korean brands, Indian car manufacturers can tap into this niche in the Russian market, as many of them have already entered mass production of their vehicles. For example, in 2022, large Indian conglomerates like Mahindra and Maruti are expected to introduce updated car models.
In addition to the automotive sector, India has made significant strides in smartphone production. The recent release of the Lava brand’s X2 smartphone is likely to make its way into the Russian market this year, offering a viable alternative for budget-conscious buyers (with an estimated cost of 9,000 rubles). It is worth noting that Lava relied on its own developments to create this model, ensuring that their products will not face export restrictions to Russia. The key factor is to what extent Lava deems it promising to establish sales channels in other countries.
In summary, Indian brands have a favorable opportunity to enter the Russian market in 2022. Some companies have been successfully collaborating with Russian manufacturers for a long time, while others have reached a certain level of development to present their products in international markets.
Opportunities for Turkish Brands in the Russian Fashion Retail Market
Based on data from the Federal Customs Service, the trade turnover between Russia and Turkey witnessed a significant increase of 57% in 2021 compared to the previous year, reaching $33.025 billion. It is likely that this figure is still far from the limit for the market economies of both countries, as the Turkish government has no plans to terminate their mutually beneficial relations with Russia.
Meanwhile, the Russian market, particularly the fashion retail sector, is in great need of new brands more than ever. With the closure of stores by most European and American companies in the Russian Federation, this niche is only partially filled by domestic brands and Chinese manufacturers.
Furthermore, Russian companies heavily rely on imported raw materials. As a developed exporter in this market segment, Turkey has the capability to meet a substantial portion of the fashion retail needs.
It is worth noting that Turkish brands have been successfully present in the domestic market for a long time. One notable example is the Flo conglomerate, which established its own representative office in Russia and introduced five shoe brands to the Russian market in 2021. However, the company does not plan to stop there and intends to launch another Nine West franchise project within the Russian Federation in the near future.
In terms of clothing, Turkish companies such as LC Waikiki, Koton, and Colin’s also have a presence in the Russian market. Currently, these brands are experiencing significant increases in sales due to the absence of European goods, with the mass market audience shifting their preference towards them.
But the potential for development is not limited to this! Bulat Shakirov, President of the Union of Shopping Centers, predicts that in the near future, even more Turkish and Chinese brands may appear in shopping centers due to the risk of a 30-40% increase in vacant retail spaces. The Union has already initiated negotiations with Turkey, where they have identified over 200 brands that are likely to be in demand among Russian buyers.
In summary, Turkish companies possess substantial potential in the field of fashion retail, and there are promising prospects for their entry into the relatively uncompetitive Russian market.
In Conclusion
The year 2022 will be remembered as a period of mixed outcomes for Russia’s market economy. The departure of most Western brands has resulted in both negative consequences and opportunities for companies from other parts of the world. The sooner new brands enter the Russian market, the greater their chances of capturing the attention of the potential audience in a short span of time.
However, it is important to remember that venturing into a new market, even in the absence of competition, is a significant step that requires careful planning and preparation.
If you are considering Russia as a promising destination for business expansion, it is advisable to rely on the expertise of professionals from the QB Agency. They possess a deep understanding of the marketing tools necessary to attract the right audience in the Russian market and can guide you through the process effectively.