Crouching Bear, Hidden Dragon: China and the future of Russia’s e-commerce market

By Miranda Lupion

By now you’ve probably heard about the battle for Amazon’s second headquarters. But Russia’s e-commerce market is witnessing a fight of its own. From Chinese giant Alibaba to leading Russian lender Sberbank, both foreign and domestic players are competing for page views and purchases. What is the current state of Russia’s nascent yet rapidly developing e-commerce scene? And what challenges lie in store?

The State of Russia’s E-Commerce Market

Over the past three years, unlikely conditions (pg. 1) popularized online shopping in Russia. The impact of sanctions, low oil prices, and a ruble devaluation coupled with high rent costs and low consumer demand have challenged brick-and-mortar stores while propelling the growth of digital retail. The industry has attracted venture investments of US$2.6bln annually (pg. 1). In 2015, one in 5 Russians between the ages of 16 and 55 made at least one purchase online. By 2016, this figure jumped to one in 4, meaning around 43 percent of population or an estimated 62 million Russians (pg. 14) were shopping online. (Statista puts this figure at a more conservative but still impressive 46 million.) Clothing and shoes, followed by toys, hobby, and DIY products rank as the most popular purchases from both domestic and foreign sites. In 2017, business-to-consumer e-commerce accounted for an estimated 1.39 percent of Russia’s GDP (pg. 17) and 2.8 percent (pg. 18) of total retail sales. In 2018, figures are expected to rise to 1.71 percent (pg. 17) and 3 percent (pg. 18) respectively.

Although these numbers may seem low, GDP and retail figures fail to capture Russia’s appetite for cross-border products. Statista reports that Russia is actually ahead of a handful of EU countries in e-commerce spending. Chinese retailers are especially popular in cities with 100,000-500,000 residents, where both local choices and incomes are usually limited. In 2016, the number of imported orders increased by 73 percent (pg. 24). Local market orders rose only 6 percent (pg. 24). In the first quarter of 2017, Russians spent 106 percent more in foreign online stores than during the same period in 2016. China is the real winner though; in 2016, 80 percent of Russia’s cross-border orders came from China. Alibaba’s AliExpress became Russia’s most visited online store with over 22 million (pg. 15) unique visitors per month. 85 percent of Russians shopping on AliExpress live in the regions. For many of them, AliExpress marks their first experience with online shopping (pg. 15).

Digital Developments

Strides in internet connectivity and electronic payment methods have especially benefitted cross-border retailers. In 2016, Russia’s internet penetration rate tied with the U.S.’s at 76 percent: given the right consumer spending dynamics – though they’ve lagged of late – Russia may ripen for online buying. With smart phone penetration nearly topping 53 percent, Russians are starting to browse on smaller screens too. The spread of internet-linked devices is especially crucial for consumers living outside big cities, who tend to prefer foreign retailers and who may not have fixed broadband subscriptions at home. While the share of Russians shopping on smartphones is still less than 20 percent, mobile internet penetration is expected to reach nearly 62 percent by 2022. This development is good news for foreign retailers; 21 percent of Russians who prefer to shop internationally also prefer to purchase using their mobile phones.

Even when ordering online, cash on delivery (COD) was traditionally the go-to payment choice for Russians – a limiting factor for foreign sellers. However, in 2012, AliExpress launched a QIWI wallet payment option, allowing Russians to use an app they already trusted to pay digitally. This along with the later widespread adoption of PayPal (pg. 11) lowered the barrier to e-commerce entry for small and medium-sized enterprises as well as consumers. In 2016, 60 percent (pg. 40) of domestic sales were still paid for through COD, but shoppers paid for almost 100 percent of their cross-border (pg. 40) purchases in advance, usually via PayPal, Visa, or QIWI. Despite the lingering popularity of COD for domestic orders, 2016 marked the first time the majority of Russia’s online shoppers made at least one payment with a click.

Challenges for Chinese Retailers  

While foreign retailers reap the rewards of Russia’s digitization, they lose out on delivery. High international shipping costs are compounded by poor infrastructure so Russians prefer “click and collect” shops over post or courier delivery. In 2015, 72 percent (pg. 43) of consumers collected online purchases in stores. Russian e-commerce players Ulmart and Citilink both allow buyers to collect their purchase at outposts or brick-and-mortar stores (pg. 12-13).

This preference for pick up cripples growth for cross-border retailers, who typically ship packages first through their national postal service and then the Russian post. In a survey on e-commerce, Russia’s respondents reported they prefer to buy from foreign retailers where products are cheap. However, they are concerned about both the customs and shipping aspects of international delivery. Russia, endowed with territory the size of Pluto’s surface, ranks 99 out of 160 on the World Bank’s Logistical Performance Index, which measures the efficiency of customs clearance process, quality of trade and transport infrastructure, and ease and quality of logistical services.

Beyond these structural barriers, Russian internet company Yandex is gunning to challenge China’s massively popular online retailers. Sberbank abandoned joint talks with Alibaba last month and instead announced a US$1bln deal with Yandex, Russia’s most popular search engine. The joint venture effectively doubles the tech company’s value, linking Sberbank’s customers to Yandex.Market while transforming the site’s price comparison function into a fully-fledged online retailer.

While Yandex’s expansion could threaten Alibaba, the Chinese giant has been thinking ahead. In October, the company began testing its Tmall in Russia. Tmall orders ship directly from Alibaba’s partner warehouses in Russia, putting the site on par with its domestic peers and giving the soon-to-launch Yandex.Market a run for its money. The Kremlin should invest in delivery infrastructure and simplify its customs controls not just to make buying Chinese knockoffs easier, but because these changes will help the country’s own sellers abroad. Russian retailers have successfully sold digital goods internationally, but customs and shipping constraints (pg. 22) have prevented the large-scale sale of physical products. The e-commerce game is not zero-sum, and these improvements have the potential to benefit both the dragon and the bear.

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