In an article published this week on Fortune’s website, Maelle Gavet, CEO of Ozon.ru sets out some reasons why the Russian e-commerce market should not be overlooked, and why in some respects it is more attractive than China’s.
The article would be better off in the “advertisement placed by my financial PR firm” section of Fortune’s website rather than as an apparent editorial contribution. It is shocking in its lack of balance and subtlety.
It even makes the absurd statement that “… Russia is on par to be an equally attractive … investment opportunity in the days and years ahead.”
Clearly this cannot be possible on a macro level. China’s current GDP is about 3.3x the size of Russia’s, and by 2050 China’s lead is projected to more than double, to 7.7x the size of Russia. I don’t think even the Russian government would seriously contend that the country could ever outpace China’s economic potential.
However, a plausible case can be made that investment returns in specific cases (such as Ozon.ru’s putative upcoming IPO) could be on par with, or even superior to, Chinese investment returns.
The primary reason is that the frenzy of international investment which China attracts makes the landscape in Russia much less competitive. Secondarily, Russians have a much higher average income and are far more disposed towards spending it.
Let’s examine some specific reasons why Russia’s overall e-commerce potential compares unfavourably to China’s.
A shrinking population. The Fortune article places Russia’s total Internet users at roughly 84 million (a penetration of 42.8%). By contrast, China’s Internet population stood at 513 million at the end of 2011, after the country added 28 million users during the 2nd half of the year (a penetration of 38.3%). Moreover, the Russian population has been declining in absolute terms since 1992 (see attached chart), although recent trends for both countries show a declining trend.
There is no rational basis to compare the population and growth potential, nor the potential consumer spending power of the two countries. China has vastly more Internet users, its absolute user base is growing more quickly, it has more upside in penetration, and its per-capita GDP is growing more quickly.
Tepid economic dynamism. While both countries have state-owned actors controlling financial services and resource sectors, China has a far longer history of encouraging individual entrepreneurship in non-strategic sectors, which is also arguably in the DNA of its population. Such reforms were initiated by the communist regime in 1978.
By contrast, Russia’s communist legacy still prevails in the attitudes of a substantial segment of its population, which considers private business and capitalism as bordering on evil.
The results are evident in Russia’s relatively moribund SME sector and lack of export competitiveness in high-tech or manufactured goods. It certainly doesn’t help that Russia imposes payroll taxes (e.g. for state pension funds and insurance) of well over 30%, which are punitive for small businesses. Rather than moving to liberalize the economy, Russia is moving in the opposite direction, as most visibly evidenced by the creeping duopoly of Sberbank and VTB in the banking sector.
The end result is this: the 2011-12 World Economic Forum competitiveness study ranks Russia’s economy at #66 (out of 142) with a declining year-on-year trend, while China is at #26 and has been advancing its rank in recent years.
Vulnerable economic structure. The cornerstone of Russia’s economy and exports is its natural resource sector. Russia’s tax revenues are directly tied to energy prices and production quantities, leaving the national finances especially vulnerable to a steep decline in oil, gas and precious metal prices.
The long-term trends are against Russia. As the global economy becomes more digital over the coming decades, the typical carbon footprint in the advanced economies is set to decline, along with the relative importance of energy-intensive industries. And a decline in demand does not portend a great future for commodity prices.
Even worse for Russia’s “new economy” potential, some important measures of “Technological readiness” cited in the same World Economic Forum study are near the bottom of the global rankings: Availability of latest technologies (#121), Firm-level technology -absorption (#130), FDI and technology transfer (#129).
Lest I be accused of being equally unbalanced in my negative assessment of Russia’s relative e-commerce investment opportunity, it is true that Russia’s GDP per capita, at US$10,437, is more than twice the size of China’s US$4,382 (per the World Economic Forum study). Moreover, Russians have a much greater proportion of discretionary spending money given the low personal debt, personal taxes and consumer energy prices, and the low social priority placed on savings and investments (Russian consumers’ estimated savings rate in 2011 was 13% compared to China’s 31%). One way to interpret this is a pessimism about the future. But it certainly is good for retailers’ prospects in the country. Even nihilists need shoes.
I do agree that an investor can potentially do quite well in Russia, as long as he gives the (alleged) crooks and thieves who run the country their cut, and stays clear of their economic turf, lest his business be expropriated and he lands in jail (or worse).