Constraints and opportunities in the Russian market – best practices for global online merchants

Adrien Henni, East-West Digital News, elaborates on the constraints and opportunities in the Russian market and shares best practices for global online merchants

So far, a relatively small number of international online retailers have made specific efforts to develop their sales into Russia. This reserved attitude towards a large economy is explained by several reasons: Russian ecommerce is viewed as a small market on the global map, and it seems dominated by Chinese players. Meanwhile, e-merchants apprehend localisation, payments, logistics, and customs complexities. 

Not all these considerations are well-grounded. As a matter of fact, foreign online stores have become hugely popular in Russia over the past five years. As of September 2018, according to a GfK-Yandex survey, 76% of Russian e-shoppers declared to have made online purchases from abroad – almost as many as those who said they made purchases from Russian websites (88%). 

Cross-border sales value split by product category (2018) 

Source: AITC/AKIT and Sberbank, cited in EWDN’s ecommerce report 

The Russian market is relatively small, but it is growing fast. In 2018, Russians made some 300 million cross-border orders, up 34% from 2017. This was more than half of the total number of online orders in Russia, according to Data Insight (However, cross-border orders accounted for just 23% of the total value of online orders from Russian consumers. The difference is due, in particular, to the large fraction of low-value cross-border purchases made from Chinese sites.). 

In total, domestic online sales reached around USD 20 billion in 2018, while inbound cross-border flows amounted to approximately USD 5 billion (not including digital goods and services). Under optimistic, but not unrealistic scenarios, these numbers could double in just a few years. 

International openness 

Western players did experience a setback in 2014-2015, as the rouble fell by nearly 50% and Russia was hit by an economic crisis – which continues in a milder form today. AliExpress seized the opportunity to enter the cross-border market and acquire a sound leadership position. 

However, the market is not closed to other players, which may position themselves and succeed in a variety of market segments or niches. Western players saw their sales resume in the past two years, as exemplified by ASOS and iHerb. These sites attract around 1.5 million visitors each month, up 21% and 22% from September 2018 to June 2019. iHerb alone shipped around 700,000 parcels on average per month as of mid-2019 (unconfirmed data from an industry insider). 

Worthy of note is the fact that, on the domestic scene, a range of Western players have gained an enviable position. Lamoda, launched in 2011 by Rocket Internet, has become the leading fashion and lifestyle-focused ecommerce company in Russia, generating USD 463 million in sales revenues in 2018. 

IKEA was one of the fastest-growing Russian online stores that year (+366%), with a strong omnichannel strategy, while Hoff and Leroy Merlin achieved impressive performances both offline and online. Otto Group – which used to be among the market leaders – was less successful: this German group shut down some of its online properties in 2018. 

Meanwhile, a wave of Turkish players is now entering the Russian cross-border market. These players have included, most recently, Hepsiburada, N11.com, and Ziylan Group. New waves of market entrants could now come from South Korea, Japan, and Vietnam, market observers believe. 

Light tax burden and easier logistics 

The majority of cross-border purchases are tax-free. Customs taxes are applied only if their cumulative amount per month and per person exceeds EUR 500 (previously EUR 1,000) or if their cumulative weight per month exceeds 31 kg. Purchases above this threshold are subject to a 30% customs fee. 

Starting from 1 January 2020, the threshold will be lowered to EUR 200 – but per package, not per month; and the tax rate will be lowered, too, from 30% to 15%. In the EU, by comparison, taxation is imposed for purchases above EUR 30. 

Therefore, traditional hurdles such as payments, logistics, and customs tend to disappear. Moreover, several Russian service providers offer a highly professional service while some international players have made serious steps to address the country’s specifics. International merchants may also rely on marketplaces such as Bringly, Joom, and Aliexpress, as well as sites like Lamoda, Ozon, or Wildberries, which will relieve them from a range of operational headaches. 

Personal data legislation 

Meanwhile, the demanding Russian laws on personal data have created new constraints. All companies, both domestic and foreign ones, must store the personal data of their Russian users or customers in servers located physically on Russian soil. The Russian authorities have already blocked access to LinkedIn for not being in compliance; they are expected to pay increased attention to the ecommerce sector as well, with regards to this legislation. 

A lesser-known fact is that this local storage requirement also applies to the personal data related to payment operations. This practically means your payment service provider must store Russian personal data in Russia, not on global servers. 

Foreign e-merchants are encouraged to allow their Russian customers to settle their purchases using specific local payment methods – including e-wallets such as Yandex.Money, WebMoney, and Qiwi, as well as the MIR national bank card. 

The good news is that there are no specific security issues to deal with when working with Russian consumers, and that it is not necessary to offer them payment-on-delivery options for cross-border purchases, even though this payment mode is still often used for domestic purchases. 

This market is analysed in detail in EWDN’s Russian E-Commerce Report. Download it here. 

This editorial was first published in our Cross-Border Payments and Commerce Report 2019 – 2020, which provides a comprehensive overview of the major trends driving growth in cross-border payments, cross-border commerce, and marketplaces.

About Adrien Henni 

Adrien Henni is Chief Editor at East-West Digital News (ewdn.com). With nearly 20 years of experience in the high-tech and venture businesses in France and Eastern Europe, he advises a variety of startups, investors, and other organisations. He is a regular contributor to industry publications and speaks at conferences across the world. 

About East-West Digital News 

EWDN is a news, research, and event agency dedicated to tech innovation and ecommerce in Eastern Europe. A consulting branch provides international players with assistance for market research and business development in the region.