Russia

Effective Approaches to Digital Marketing

In terms of visibility to consumers, the three most effective and popular methods of improving an online shop’s digital exposure in the Russian Federation are:

ORGANIC SEARCH VIA SEARCH ENGINE OPTIMISATION (SEO)

Of the three approaches listed above, directing organic traffic to an online website via keyword advertising is a financially appealing and decisively targeted option, and it has proved successful in practice. In terms of overall return, however, it is slower and arguably less effective than the stated alternatives, and the risks associated with this option are greater due to frequently changing web algorithms. There are essentially two major players in the search engine market in Russia: Yandex and Google, which boast market shares of 60.5% and 29.7% respectively. Importantly for an online retailer into this territory, in recent years Google has been increasing in popularity and Yandex’s market share has been declining as a result.

Both of these search engines operate in Russia via very developed algorithms, and a prospective e-Retailer into this territory should plan accordingly and expect the same level of SEO sophistication as would be encountered in Western markets. If your website is in English, the chances of your online shop or product appearing in an organic search in Russia are low unless you have a very niche offering and there are no or few corresponding links in Russian. This is a particularly important consideration as appearing organically on search engines is a huge driver of Russian customers to foreign online shops.

Website analytics play an important role in an e-Retailer’s marketing strategy generally, but it is also worth highlighting that these same analytics contribute to a website’s positioning on domestic search engines. These Search engine algorithms are designed to display a hierarchy of websites with particular preference for pages that attract more consumer time, and e-Retailers looking to improve their digital visibility in the Russian Federation should make use of Yandex’s ‘Yandex Metrica’ and Google’s ‘Google Analytics’ to evaluate their search engine performance. These analytical tools further allow retailers to examine the performance of their online shops by providing a means to analyse customer behaviour, allowing an e-Shop owner to see his webpage navigated by consumers through the consumers’ eyes. This allows him sight of what his customers are clicking, which areas of particular pages attract the most interest and typical customer scrolling habits. Yandex additionally has several unique features for SEO specialists that can prove invaluable when building digital strategies in Russia. WORDSTAT – a word selector tool – will not only help e-Retailers and the right keywords for their SEO activities, but will also display the number of search requests for that specific word/phrase by region and time period.

Organic search via SEO undeniably offers a valuable driver of website traffic, both within Russia and abroad, and it’s important to remember that search engine trends in Russia are consistent with global ones. e-Retailers should therefore take note of certain occurrences across their international expansion initiatives, for example the fact that search engines favour interactive websites – those that engage consumers through mechanisms like commenting upon or ‘liking’ aspects of webpages, or through the embedding of videos. Ultimately, the hierarchy of search engines is dif cult to manipulate, so fresh, multimedia and interactive content in Russian, as well as content relevant to search requests, are vital component of any e-Retailer’s offering.[20]

PAY-PER-CLICK (PPC)

As with many jurisdictions, within the Russian Federation Google AdWords is a well-known and commonly-used marketing tool. Yandex offers a similar PPC marketing option – Yandex Direct – which together with the reputation of the search engine has achieved considerable success and popularity. These two major tools can form the backbone of an e-Retailer’s PPC strategy in Russia, though there are additional options on the market. Competitors, however, play a comparatively minor role. When putting together a PPC strategy for Russia, an e-Retailer looking to launch a brand presence in the location should always check the price and competition of his selected keywords in both major search engines in order to get the most from his marketing budget and PPC campaign.

Prices and customer conversion rates vary across both tools, and the extent of this largely depends on the state of the market and consumer preference. Often, an e-Retailer can make signficant savings on one specific keyword simply by relocating his PPC budget from one search engine to the other. There are additionally solutions on the market that allow for automatic management of a PPC campaign with several search engines; these can often maximize the benefit of such endeavors, but come at an additional cost. Pay-per-action (PPA), retargeting and other digital tools are also available options, and Yandex leads the way in contextual advertising in the Russian Federation in terms of overall spend.[21]

Major shopping categories

Russian consumers display a clear preference for certain categories of goods when shopping online, and three in particular take up a signi cant proportion of this online marketplace: consumer electronics and white goods (42%), clothing and footwear (13%), and car parts (10%). Digital sales of clothing and footwear have seen dramatic growth over the past few years, partially due to the fact that consumers are getting used to using the free returns option offered by many e-Retailers in this location.

Major retail holidays

• December 31st – New Year’s Eve Shopping
• January 7th – Christmas Shopping
• March 8th – International Women’s Day

Overview

With over 70 million people using the internet monthly, Russia has the largest online audience in Europe.  Despite the difficult economic situation, the long-term prospects for growth look good.  According to the new edition of East West Digital News Agency’s (EWDN) Russian eCommerce Report, which cites data from the Russian agency Data Insight, online sales in 2016 exceeded $26 billion, growing more than 20% year-on-year.  Included in this figure are $16 billion for physical goods and $10 billion for online travel.  Up to 2015, the online market grew 25% annually.  Data Insight also reports that in 2015, Russia’s domestic online retail grew in rubles, reaching 650 billion (+16%), with an average order value amounting to some 4,050 rubles (up from 3,750 rubles in 2014).  However the picture looks different if viewed in U.S. dollar terms given the ruble’s sharp depreciation:  the market size fell to $10.5 billion, down 28% from 2014, which tracks more accurately with the recent economic recession.

Security

THE CIVIL CODE

In the Russian Federation, the Civil Code is the primary source of civil law. Importantly for a prospective e-Trader into Russia, this law governs – amongst other things – civil relations between Russian citizens, the purchase and selling process, intellectual property rights and the rules relating to identifying which jurisdiction’s legislation is applicable in a particular international transaction. In contrast to Russian consumers, domestic Russian legal entities encounter very onerous procedures and processes when it comes to purchasing products from foreign online shops, as legislation regulating the international economic activities of Russian legal entities imposes very strict documentary rules for such purchases, both for the transaction itself and for the associated customs clearance procedures.

Because of these rules, where avoidable few internationally-based companies sell to Russian legal entities; it is much easier for a Russian legal entity to make online purchases from other Russian- based internet shops, or otherwise make international purchases as individuals where processes are simpler. Where a foreign online retailer does choose to sell to a Russian legal entity, this legal entity can only refuse a product and demand a refund where there is a significant problem with the quality of the product purchased; i.e. where it is not fit for purpose and/or the cost of repairing the product is higher than its original price. Individuals are thus afforded much greater protection than legal entities when it comes to product quality.

Whether a Russian individual or organization is buying from a foreign internet shop or a Russian one depends upon the status of the owner of the venture – i.e. whether it is a Russian or international legal entity. In accordance with Russian legislation, it is the responsibility of the seller to inform a buyer of the pertinent details of a transaction, i.e. who is offering the goods for sale and the conditions of sale, and penalties are imposed for the breach of this duty. Where an international e-Retailer wishes to operate via its own warehouse within Russian borders, it first must establish a Russian legal entity, though it is possible to contract separately with a third-party Russian commercial warehouse. In such cases, goods must move from an international legal entity to a Russian counterpart; foreign legal entities are unable to declare goods in Russia for the purpose of customs clearance procedures. A Russian legal entity, whatever the form, will then be able to sell goods to consumers. As stated previously, a foreign legal entity’s affiliate/branch office can clear goods from abroad, but only if they are for the office’s internal use.

Domestic and Preferred Card Schemes

The most commonly used electronic money service in Russia was reported to be Yandex.Money, with 22% of survey participants reporting the use of this digital wallet in the allotted timeframe. This was followed closely by Qiwi with 21% participant use. The study examined studied brand awareness amongst respondents of these same e-Wallet providers, and Yandex.Money again came out on top.

Credit card penetration in Russia is fairly low, and consumers prefer to use e-wallets such as Yandex or WebMoney which can also be topped up at cash terminals such as Qiwi. A popular payment method is the Virtual Visa card from Qiwi. The service allows customers to deposit cash at any of Qiwi’s terminals all around Russia and receive an SMS with Visa card details that can be used online to make a deposit.

Mobile Appetite

In Russia, mobile penetration closely echoes the average of the global percentages (50% smartphone ownership, 17% tablet ownership within Russia versus the 51% and 21% global average). Shopping with these devices is less popular however, as only 13% purchase with smartphones and 7% with tablets. Positively though, 57% of Russians intend to use smartphone and tablet technology to purchase goods in the next year. 

Recently, Google has been picking up pace, according to TNS. Google has become the most popular internet service in Russia (taking into account all devices). Google websites and applications are used by 20.5 million Russians per month. Yandex performs slightly less – 20.4 million, Mail.ru – 19.3 million. However, Yandex is the daily audience leader with 12.3 million uses, while Google is 3rd place with 11 million. 

Internet users in Russia lead Europe in time spent online, with users spending an average of 4.8 hours on the internet every day. When an individual in Russia owns a desktop/laptop/notebook computer and two or more mobile devices, 50% of their time online is spent on a mobile device as depicted below. E-Retailers looking to target Russian consumers should take this into account when developing their digital strategies.

Alternative Payments Methods

Despite the high penetration rate of debit cards in the Russian Federation, as a whole bank cards are not used overwhelmingly either online or of ine for making purchases. Instead, a significant proportion of card holders essentially use them to withdraw cash from their bank accounts after receiving their salary; this activity accounted for an astonishing 92% of bank card transactions in 2013. TNS’ 2014 study (see above) recorded that 56% of respondents surveyed had used bank cards as an electronic payment method in the six months preceding the survey – not a particularly impressive statistic in itself when compared with other European markets – but this figure does not paint an entirely accurate picture as it is common knowledge that bank cards are more frequently used for transactional purposes in larger Russian cities (the homes of TNS’ survey respondents). The proportion of Russian consumers using bank cards to make purchases online in the country at large, then, is much lower than this figure, and when considering the purchase of physical goods it is lower still. We have also seen that Russia’s credit card market remains largely underpenetrated.

Current Market trends

According to the EWDN’s Russian eCommerce Report, Russia’s ecommerce market continued to grow in 2016 even as offline retail was severely affected by the economic crisis.  Real-estate infrastructure has become dramatically cheaper and more accessible, and key players are taking advantage to build out warehousing and fulfilment facilities. Although demand still exceeds supply on the fulfilment service market, delivery conditions across this huge country have improved.

In 2016, the most popular product groups were clothing, shoes and lifestyle, media and entertainment, telecom, consumer electronics, home and garden, health and beauty, and others.

Domestic eCommerce (B2C)

According to Yandex Report of eCommerce in Russia, payment aggregator Robokassa and analytics company Openstat identified 1.17 million “commercial sites” in the .ru, .su and .рф domains out of more than 3 million sites on the Russian Internet in 2014. Of these “commercial sites,” just a small part can actually be considered ecommerce sites as far as physical goods are concerned.  In 2014, InSales estimated the number of ecommerce sites (with a shopping cart function) at 43,000.  Of these sites, a mere 50 generated more than 4 billion rubles (approximately $100 million) in sales revenues per year, and 950 reached or exceeded 200 million rubles ($5.2 million).

Digital Invoicing and SMS Payments

SMS payments – where products or services can be purchased directly via a text message sent from a mobile phone- are another popular method of conducting online transactions within the Russian Federation, and many large Russian mobile operators such as Beeline, Megafon, MTS and Tele2 offer their subscribers the option to make online payments via this method. SMS payments work much like standard SMS: to make a purchase of a product or service, the buyer will sent a text message to his mobile payment provider. This provider will then clear the transaction between the buyer and seller, and the cost of the purchase will be added to a monthly phone bill or deducted from a pre-paid balance. By using SMS payments, mobile phone users can securely, quickly and safely pay merchants for the provision of goods or services, whether they be physical or virtual.

It is again important to note, however, that SMS payments are still used relatively infrequently for the purchase of physical goods; trust in electronic payments is low when compared with other areas of the world, and in no area is this wariness more pronounced than in mobile. Despite this hesitancy, though, such purchases are growing. Experts in the industry have reported certainty that these payments will become an ecommerce standard, and they will be an important factor contributing to the increase in the volume of purchases made through mobile terminals.

Popular Domains

By far the most popular domain names in Russia are .ru and .com, and where available these will almost certainly be the best choice for your e-Shop in this location. All other zone names will sound exotic and strange to Russian consumers, though .net and .org are certainly acceptable alternatives for IT or non-commercial organizations. The .рф domain is growing in popularity in Russia but its usefulness is limited as it is very inconvenient when it comes to organic search results. The SEO rule-of-thumb is that if you plan to promote your website, don’t use .рф – go for .ru. Administrative control and technical support of the .ru/.рф domain has been assigned to the Coordination Centre for TLD RU/ рф. The Coordination Centre for TLD RU/ рф, does not, however, perform a registrar’s functions. Registration of second-level domain names in .RU/. рф is available only through accredited registrars, a list of which is displayed at http://www.cctld.ru/en/registrators/. All geographical regions of Russia have their own second-level domains, as do many speci c sectors, and there are a number of pre-set second-level domains designated for third-level domain registration (some of the most popular of which are included in the previous table). There are currently 133 active second-level domains available for registration in Russia. Domain names are registered for a period of one year. To keep an allocated domain name for an additional year, the registrant must go through a re-registration procedure.

Cash Payment Terminals & Mobile Point-of-Sale

Cash payment terminals are and will remain incredibly popular in the Russian Federation, especially when it comes to payment for services and virtual goods. However, again this payment method is underutilised directly for the purchase of physical goods. In 2013 alone, non-banking payment terminals handled RUB 850 billion (USD 18.6 billion) in payments. Importantly, however, the use of these payment options in Russia is declining to make way for more convenient options, and the number of installed terminals has actually fallen. These terminals are touchscreen ATM-like self-service devices installed throughout Russia, and are easily accessible in public places. They provide users witha simple and safe way to deposit money into their e-Wallets (Yandex Money, Qiwi, etc.), pay mobile phone or utility bills and pay for purchases. The largest non-banking payment terminal providers in Russia are QIWI, CyberPlat and ElecsNet. Interestingly, even PayPal – an international online payments company that launched in Russia in 2013 – now gives Russian customers the opportunity to pay by cash as well as card.

A mobile point of sale (mPOS) is a compact device that receives payments made by bank card at any place or time, and is a mechanism that can be used by a courier to receive cash on delivery – an important consideration for any e-Retailer into Russia. To receive a payment, the courier presents a smartphone, tablet or dedicated wireless device programmed with a special payments mechanism to the customer, who will insert a bank card into the device to facilitate payment. The programmes and mechanisms necessary to receive payments via mobile terminals can be supplied by companies such as 2can, Lifepay and Yandex Payment Solutions.

Cross-Border eCommerce

The cross-border segment is the fastest growing, up 26% by value and 80% by number of parcels and small packages, and exceeded $4 billion for physical goods alone, according to Russian Post and industry association NAMO.

The growth of this segment has been driven in large part by Chinese companies – most notably Alibaba’s B2C marketplace Aliexpress.ru – but key western players including Amazon, Asos, Next and Yoox are also in the game.

According to eMarketer, in 2015, 39% of Russia’s online shoppers made a cross-border digital purchase at least once that year.  Clothing, accessories, and footwear are the most common products Russian shopper by abroad, making up over 51% of Russian cross-border digital purchases.  The second most purchased category of goods are cosmetics, beauty and health products.  The leading categories come as no surprise, as many Russians hold a high value on appearance and name brands.  Some other popular categories Russians look to shop abroad for include toys, electronics, and household goods.

Customer Experience

Unquestionably, when expanding into Russia an e-Retailer should examine and provide for the payment method most commonly used by consumers for the purchase of goods in the location. Ultimately, the payments market in Russia is still developing and great change in the area is inevitable. Providing popular options will allow you to meet the payment expectations of any Russian consumer. The more payment methods you allow for, the more success you will have in this location. Indeed, according to Yandex.Money, the use of popular online payment methods helps e-Shops to increase successful orders by 10-15%.

The use of electronic payments systems will continue to increase in Russia, particularly with government encouragement favouring the development of ecommerce in the country. Online payments systems are integrated by State institutions, such as the Tax Service – , public transport providers and law enforcement (enable users to pay taxes, travel cards and nes), with increased frequency, and these projects help to increase the number of Russians who are aware of online payment methods and enhancing their overall con dence in these systems. New payment methods (such as recurring, one-click and mobile acquiring) – now just emerging – will likely develop and improve exponentially as a result of increased demand and knowledge.

B2B eCommerce

According to Moscow Times research, in 2015, 68 % of Russian corporations used electronic trading platforms for procurement purposes.  According to data from B2B-Center, online corporate and government purchases ballooned by 40% in the first nine months of 2014 compared with the same period of time in 2013.

The majority of this business sprouted from construction goods and services, with more than one-fifth of all purchases made in 2014 falling into this category.  Trailing close behind was the procurement of machinery and specialized products for the mining and oil-field industries, making up 18.6% of all online B2B purchases seen on
B2B-Center.

As B2B online shopping increases in Russia, the industry has become tightly regulated. Transactions made through B2B ecommerce platforms are legally binding due to the large financial value of these purchases.  Procurement procedures, especially for state-run entities, face strict legal requirements.

Payment Regulation

Research should be done well in advance of launching a digital shop – the facilitation of payment is an area which can make or break success in a region and as an online merchant, one cannot just enter the Russian market with a ‘basic’ web counter and a Russian bank. It is important to offer a tailor-made solution. Should it be required, varying degrees of third-party assistance, for example through the services of a specialised payments service provider, are available.

Local Entities

The foundations of the Russian banking system are provided by the territory’s federal laws, and the banking sector is subject to stringent regulation, though this has been relaxed somewhat in recent years. Financial institutions in Russia have to meet mandatory legislation requirements, as well as comply with numerous CBR instructions and regulations.

Butt the Russian banking sector is dominated by State-owned financial giants such as:

• Sberbank;
• Vnesheconombank (VEB);
• VTB Bank;
• Rosselkhozbank;
• Gazprombank;

Russian non-residents have the ability to open and operate ruble and foreign currency bank accounts in the Russian Federation, so long as this is done with an authorised bank. Payments in foreign currencies are generally permitted without restriction between non-residents, though payments in rubles between such parties are only permitted through accounts opened in Russian banks. Transactions between residents and non-residents involving payments in rubles and foreign currency can currently be conducted without limitation, though there are procedural requirements for such operations. Foreign currency can be imported freely into the Russian Federation by residents and non-residents alike. In the case of individuals, both categories must le a written customs declaration when importing currency in cash, travellers’ checks or securities if the value is more than USD 10,000.

The situation when it comes to exporting foreign currency in this location is a bit more restrictive. Both resident and non-resident individuals can export foreign currency up to a value of USD 3,000 without a customs declaration, and up to USD 10,000 with a declaration. Exports of currency over this amount are additionally permitted, though further procedural and documentary requirements must be adhered to. It should be noted that the CBR closely monitors currency transactions involving the import and export of goods between residents and non-residents using transaction passports. Thus, certain documents relating to such transactions must be filed with the bank. This is quite a complex area and is subject to frequent change, particularly in light of the 2014/2015 economic crisis which has made stricter currency controls a definitive possibility. It is thus recommended that professional advice is sought in this area.

Popular ecommerce site

The top most popular B2C sites are WILDBERRIES.RU, ULMART.RU, CITILINK.RU, MVIDEO.RU, ELDORADO.RU, LAMODA.RU, OZON.RU, EXIST.RU, SVYAZNOY.RU, KUPIVIP.RU, AVITO.RU, ALIEXPRESS.RU

Mobile Payments

Overall, mobile device traffic only constitutes around 7% of all traffic to Russian websites, and so far only 21% of surveyed smartphone users living in Russian cities with a population of 100,000+ have made purchases via their phones, although the proportion increases in Russia’s largest cities, Moscow and St Petersburg, to 23.6% and 23.9% of smartphone users respectively. Interestingly, at present Russian consumers spend a comparatively small proportion of their mobile browsing time shopping online. TNS in their 2013 research discovered that most people in Russia use their smartphones for social networking, messaging and search, whereas only around 10-15% of surveyed respondents used their smartphones for buying or ordering products online.

It is important to note, however, that almost 40% of Russian respondents surveyed by TNS stated that they researched information about products using a smartphone before buying the products offline or via another device, and so –even without the promise of dramatic future m-Commerce growth – this is a channel that shouldn’t be ignored by a prospective e-Retailer into Russia. A report entitled ‘The Russian m-Commerce Market in 2014’, presented by the marketing agency, has additionally indicated that those Russian consumers who have purchased tablet devices are much more likely to complete the online order process using those devices than those shopping on smartphones. The report stated that around 48% of tablet users made purchases of goods and services via these devices in 2014. Sales of tablet devices are increasing dramatically in Russia, so m-Commerce sales in the territory will certainly increase as a result. Of course, as is the trend across the globe, a main driver of m-Commerce in Russia will be an increase in smartphone and tablet penetration amongst Russian citizens, and we can only expect order numbers to increase as a result.

Online Payment

Cash-on-delivery (COD) is the existing trend for physical goods and will remain so for some time, although the use of electronic payments is slowly increasing.  Despite being used by a minority, many forms of electronic payments are on the rise.  EWDN’s report states that according to the opinion of industry experts and ecommerce executives, the use of electronic payments will continue to rise.  There are differing opinions on the specifics of using bank cards online.

Various forms of electronic payment are on the rise, even though they are used only by a minority of consumers.  In addition to bank cards, the use of which is growing slowly, several new solutions and offers appear each year, and some of them are intended to create a universal means of payment.  Large segments of the electronic payment market are led by domestic players, from payment terminal operators to mobile carriers to electronic currency companies.

Mobile e-Commerce

The number of mobile shoppers has exceeded 8.5 million. These numbers are expected to increase dramatically as mobile internet and smartphone devices grow in popularity across Russia.

Digital Marketing

The amount and frequency of searches for your product or service should be analyzed prior to launching a campaign in Russia.  As well as using Google Trends, there is the useful Yandex service to help you select the right words to use on your website to attract consumers:  wordstat.yandex.ru.

Major Buying holidays

Foreign retailers must prepare their advertisement campaigns, promotions, and products for Russian New Year, Men’s Day, and International Women’s Day.  These three holidays drive a significant portion of Russian online shopping and vary from Western holidays.

Over the past few years, Russia started participating in Black Friday weekend sales to kick off the winter holiday shopping season. For the most part, shoppers make their purchases throughout December for the ever-popular Russian gift-giving day on January 1. The majority of shoppers don’t start shopping in November and many last-minute shoppers are still making purchases in late December when Westerners have already returned their gifts. A third of Russian holiday shoppers turn to the Internet for gift ideas and to make these purchases – 14% of shoppers search online, but then purchase in stores.

Russia recognizes men on February 23, which is Men’s Day or otherwise known as “Day of Fatherland Defenders”, and celebrates International Women’s Day on March 8. During the weeks leading up to these holidays, Russians search for a number of gifts in the cosmetic and electronics categories to recognize their friends and family members.  Combined, these three holidays make the winter a very important shopping period unique to Russia.

Beyond these holidays, Russians also search online for Valentine’s Day gifts, wedding gifts, and birthdays.

Social media

More than 90% of Russian Internet users access social networks. The most popular social network in Russia is VKontakte, which has over 380 million registered users, 65% of them live in Russia.  VKontakte has 80 million visitors per day, 60% aged 25 or older.

Shipping 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.

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 signi cantly 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.

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

Infrastructure

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 bene ts 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 fulfillment 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.

SETTING UP PHYSICAL WAREHOUSE

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 commerce 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 reluctance 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.

Import Duties

VAT

VAT is imposed on all goods imported into Russia and is also applied to the sale of goods, work and services. According to recent amendments to the Tax Code the same VAT regime applies to goods and services that are sold in or imported into territories under Russian jurisdiction e.g., artficial islands and drilling platforms on the continental shelf. Under the new rules, certain types of works (services) provided for the purposes of geological study, exploration and development of hydrocarbons on subsoil plots located on the continental shelf, exclusive economic zone of the Russian Federation and (or) the Russian sector of the Caspian Sea bed are subject to Russian VAT.

The tax period for VAT for all taxpayers and tax withholding agents is a calendar quarter. Starting from 1 January 2015, as a general rule taxpayers must pay VAT in equal instalments not later than the 25th day of each month following the reporting quarter. Current legislation imposes a VAT rate of 18% on the sale of most goods, work and services. A lower 10% rate is applied to limited types of goods, such as pharmaceuticals, medical equipment, and certain food products and periodicals.[16]

RECENT AND UPCOMING ECONOMIC AND POLITICAL 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.

The EEU will continue to have in uence on import tariffs to both Russia and other Union member States, and changes in this area are anticipated. Importantly, the Union’s commission is currently working on the introduction of harmonised de minimis duty threshold limits for its member States (see Customs Clearance Procedures), an action which could not only reduce the frequency of more expensive Russian consumer purchases from foreign online shops, but also remove the possibility of a non-member international entity bringing goods into Russia through one of the other member States, ultimately benefiting from a nation’s formerly more- favourable threshold limits.

Russia is additionally a member of many international treaties that regulate cross-border trade, including the Vienna Convention, which governs buying and selling between its signatories. In accordance with Russian legislation, if an international norm and a local norm conflict, the international norm prevails.

Foreign vs Domestic Legal Entities

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.

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 signi cantly 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.

B2B Customs Clearance

B2B customs processes in Russia will be relevant to some e-Retailers during their trading experiences into the country – either at the outset of slightly later on. Establishing recognition and demand in the Russian marketplace will lead to an increase in order volumes, and eventually there will come a time when a distance seller should optimise his expenses by shipping in bulk. Should necessity dictate, there are myriad advantages for both retailer and consumer in this approach, i.e. cheaper delivery costs and enhanced speeds for the consumer, as well as less onerous labelling and customs requirements for the retailer. Where a merchant elects to establish a physical presence in the Russian marketplace – for example where he sets up or contracts with a local warehouse – the customs procedures and rules directly below may apply. There are three broad methods of customs clearing goods bound for Russia that are to be received by businesses in the territory, all of which require preliminary customs notification.

1. The first option is for all process and procedure to occur directly on the Russian border. Goods are brought to a customs post located on territory lines where they will remain until the purchaser sends all relevant documentation for inspection and pays any associated duties. In this instance, the responsibility for documentation and payment are entirely placed upon the buyer. After clearance, the goods are transported to their subsequent destination. Significant risks include delays with information delivery, especially due to time zone differences. 18% of B2B goods are customs cleared under this scheme.

2. Businesses also have the option of using customs clearance centres located within the territory of Russia itself. Goods can move directly to these internal centres, but in such a case will require specific transit documents that allow them to cross into the territory without immediate clearance. In this case, it is the carrier who has responsibility for presenting the relevant documentation at the customs clearance centre – including these transit documents – though it is the purchaser who must prepare this documentation and pay applicable duties for goods already within borders. 80% of goods are customs cleared under this scheme.

3. The third option when it comes to proceeding through Russian customs clearance necessitates the use of electronic declaration. With this method, though goods and their transportation vehicles are physically present on the Russian border, customs clearance itself takes place in one of the centres of remote declaration located within the territory. All relevant documentation is sent to this centre, and is usually presented in electronic format. The two customs points will then communicate electronically with each other with the aim of clearing the goods, and – should the goods require inspection – the internal centre will give the order to the customs post on the border to carry this out. Cleared goods can then be shipped to different destinations within Russia right from the border

B2C Customs Clearance

From July 2010, a unified customs scheme was implemented for all goods delivered to individual customers in Russia from abroad; these rates are equivalent whether a package is delivered by a commercial carrier or the Russian Post, the national carrier of the Russian Federation. If the total value of a particular purchase is less than EUR 1000 and the full weight does not exceed 31 kg, this purchase will be exempt from customs duties altogether. It is important to note that a customer can only receive a particular purchase from abroad customs duty-free in the case that the total value of online purchases received by this customer during any one month does not exceed a limit of EUR 1000 (including cost, freight and insurance). If they do, this customer will be required to pay customs duties of 30% on the amount exceeding this limit. Customers who purchase in excess of 31 kgs per month (combined) will be charged a duty rate of EUR 4 per kg on any excess. If the customer’s monthly orders exceed both maximum weight and value, a greater charge is applied.

Whilst during 2014 the Russian Government had approved the lowering of this duty-free threshold for cross-border trade from January 2015 – legislation which could have had a negative impact on ecommerce orders in the territory by increasing the number of orders subject to customs duties, in the wake of economic recession in Russia, no further action has been taken. However, with Russia’s ascension into the Eurasian Economic Union, it seems likely that the issue of harmonised thresholds will be reconsidered as soon as economy is back on track. A specific figure has yet to be publically disclosed, and opinions are divided, but it is anticipated that this new tax-free threshold will be around EUR 500. It is important to note that even this threshold is substantially higher than the average price of cross-border shipments, so the actual impact on cross-border ecommerce will be limited. In 2014, Greenway estimated that with the introduction of the new limit, every 100th shipment would require the payment of customs duties, as opposed to the current threshold which subjects one out of every 500 orders to the tax. Retailers selling luxury goods to Russian consumers, however, might suffer from the introduction.

As has been highlighted elsewhere in this Passport, there are strict limitations on certain categories of good when it comes to import into the Russian Federation. For example, some goods can be carried only by commercial carriers, and some only by the Russian Post. Some goods are prohibited from shipment into Russia altogether, and there are some products that are always considered by Russian customs to be products for commercial – as opposed to personal – use, even when a consumer has stated otherwise. An e-Retailer into Russia should thus be vigilant in checking which categories the goods he is offering fall into before offering the products to Russian consumers. For instance, medical and photo laboratory equipment are always considered to be commercial products, and thus need to be customs cleared in accordance with B2B procedures. Additionally, video and audio CCTV surveillance products, live plants and seeds are prohibited from import for personal use, whilst cultural valuables can be carried only by commercial carriers and not by the Russian Post.

Importantly, a different customs declaration procedure is followed depending upon whether a parcel goes through the Russian Post or a commercial carrier, though the duties paid are the same in either case.

If the product is shipped by a commercial carrier, the carrier prepares the declaration and presents a list of the items transported to customs. This will include such details as value, contents, country of origin and details of the buyer for customs’ inspection. If the shipment requires the payment of customs duties, a carrier will notify the customer regarding the payment of this duty.

If the parcel is transported by a national carrier in the Russian Federation, i.e. the Russian Post, then the national carrier of the shipment in the goods’ country of origin puts forward the customs declaration, and a CN22 form- a declaration created in accordance with international postal agreements – is issued to customs authorities. Russian customs accepts this CN22 as a declaration.

If Russian customs authorities don’t agree with the specifics of a declaration, i.e. if they think that the value has not been correctly stated, then customs can approach the end consumer directly and require them to present additional documentation.

Taxation Policies

Starting from 1 January 2015 foreign companies may be recognized as Russian tax residents (and become fully taxable in Russia on their worldwide income) if they are effectively managed in Russia. The company is deemed effectively managed in Russia if at least one of the following criteria is met: (1) the majority of board of directors’ meetings are in Russia; (2) management of the day-to-day activities takes place in Russia, or (3) executive bodies’ management decisions are made in Russia. There are also certain secondary criteria which may impose an even higher compliance burden in order to avoid Russian tax residency. The secondary criteria for foreign companies to be recognized as Russian tax residents include: (1) accounting and management accounting is performed in Russia, (2) document (records) management is performed in Russia, or (3) operational HR management is performed from Russia. There is an exemption for companies with strong substance, i.e., local qualfied staff and assets in a State which has a tax treaty with Russia. This may be helpful to protect bonafide companies registered in tax treaty jurisdictions.

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.

Over the next few years, a goal of the National Association of Mail Order and Distance Selling Trade is the establishment of a State program aimed at Russian distance selling development. Unfortunately, however, despite goods intentions, actions of Russian authorities are still somewhat uncoordinated and inef cient and – whilst ministries and departments are trying to launch several stimulating programs 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. [32]

SOCIAL INEQUALITIES AND THE RUSSIAN MIDDLE CLASS

The social demographics of a targeted e-Market are an important consideration for any e-Retailer looking to sell to international consumers, and the Russian Federation is certainly no exception to this rule. The social structure of Russia is undeniably unique, and historically has been known to attract some fairly negative press. On the whole, however, the Russian Federation has made progress over the last decade in improving the quality of life of its citizens. Throughout his time in power, Vladimir Putin has promised to level the socio-economic playing eld, and has placed emphasis on growing the Russian middle class.