Regional Disparity

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RUSSIA’S RETAIL MARKET: TRENDS AND OPPORTUNITIES Summary of contents Russia’s economic outlook Russia’s retail sector Case studies Opportunities Russia’s economic outlook Since 1999 Russia has experienced outstanding growth rates, constantly improving macroeconomic conditions, and a growing involvement in the global economy. These achievements, together with high world oil prices, political and economic stability, and skyrocketing foreign direct investment have all contributed to the growth of the country’s economy. Russia’s growth: Russia is the fastest growing economy in the G8 group of industrialized nations. Over the last seven years, Russia’s economy has grown by an average rate of 6.8 percent each year and is projected to grow at an average rate of at least 7 percent YOY through 2010. In 2006 and 2007 Russia’s growth exceeded all expectations (7.9 percent GDP growth), accelerating in several key economic sectors such as retail, real estate, tourism, and communications. Russia’s stability: Russia has a very stable macroeconomic situation. Inflation runs below 10 percent, foreign currency and gold reserves have increased to around $400 billion and are now the world’s third largest, after China and Japan.1 The strength and stability of the economy was noted by the major credit rating agencies (S&P, Moody’s, and Fitch), all of which, awarded Russia an upgraded investment rating in 2006.2 In addition, the stable political environment has contributed to making the country one of the favorite destinations in the region for foreign investors. Investment: The excellent macroeconomic conditions make Russia a thriving capital market that foreign investors are increasingly finding more attractive. Foreign investment for the first half of 2007 totaled $67 billion, 3 compared, for instance, to $14 billion in Poland in the entire 2006.4 Economists say that, “unlike in China, there are no signs of overheating of the economy detectible. Modern Russia has never before seen such a growth rate and economists expect the tendency to continue.” 5 Given the most favorable conditions offered by the Russian market, the size of

1 RIA Novosti, May 21, 2007. http://www.cdi.org/russia/johnson/2007-115-4.cfm 2 Russian IT quarterly. Available on-line at: http://www.reksoft.com/misc/reksoft_co/files/137/Russian_Economy_Outlook.pdf 3 Kommersant July 23, 2007. The Russian Investment Boom Continues 4 Polish information and Foreign investment Agency. Available on-line at: http://www.paiz.gov.pl/nowosci/?id_news=1350&lang_id=1 5 Kommersant July 23, 2007. The Russian Investment Boom Continues

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domestic investment is soaring as well, with local entrepreneurs reinvesting their capital in the country’s economy. Consumer demand: In the past years, Russia’s model of economic growth has notably changed, with retail, telecommunication, and construction, among others, becoming key drivers of the country’s booming economy.6 Citizens’ real incomes have doubled over the past six years and consumer demand is thriving. The flourishing Russian economy has given rise to a growing middle and upper class that “has caused an explosion in all types of consumption.” 7 Not only is Russia’s per-capita income, at purchasing power parity (PPP), well above that of Mexico, Brazil, Turkey, China, and even EU members Romania and Bulgaria, 8 but also “70% of Russians' income is disposable, vs. around 40% for a typical Western consumer,” 9 making it a very attractive market for FMCG, food and beverage products, apparel, and luxury goods. Russia’s retail sector According to AT Kearney’s 2007 ‘Growth opportunities for global retailers’ market study, “Global retail is experiencing an explosive modernization as investment rushes into developing markets. As the...
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