Russia on the rebound?

Russia on the rebound?

Russia, the world's 12th largest economy, was hit hard by the global downturn. The drop in global manufacturing demand hit resource-rich Russia hard, which saw its GDP slump by 7.9% during 2009 in what was the country's worst recession in a decade.

However, the Russian economy has recovered some ground and figures published in September showed the country's GDP had risen by 4.2% during the first half of 2010.

Last week's buoyant sales figures from two of Russia's largest food retailers, X5 Retail Group and Magnit, could be seen as another sign of the health of the country's economy and proof that consumer confidence has returned.

However, Russia's economy remains fragile. Growth has returned but it is not at the levels seen in its three BRIC stablemates - Brazil, India and China. With uncertainty still hanging over key export markets in the West, Russia, a country reliant on commodity exports, is particularly vulnerable to any worsening of economic conditions outside its borders.

It is therefore vital to bear in mind the general economic context in Russia when looking at news of seemingly buoyant retail sales. X5 and Magnit may have both seen saw sales growth accelerate during the third quarter of the year but a closer look at the figures shows Russian consumers remain reluctant to spend.

Magnit, Russia's second-largest retailer, has just under 3,700 outlets but its store network is dominated by its discount outlets, which boosted its sales growth between July and September.

X5 Retail Group, Russia's largest retailer by sales, has a more mixed estate but its third-quarter sales growth, like Magnit, was driven by its discount stores. Russia's largest retailers may be seeing robust growth in their top lines but the dynamism is coming from the discount sector.

Victoria Petrova, a retail analyst at Credit Suisse in Moscow, says consumer sentiment in Russia remains weak. "We are still not seeing a consumer rebound. Consumers are not trading up. Discounters are performing much, much stronger on a like-for-like basis."

Nevertheless, the slow recovery seen in Russia and the current fragile nature of consumer confidence do not seem to have dented the faith that the country's food retailers have in the medium- and long-term growth of the market.

As Petrova notes, Russia's food and drink retail sector is still dominated by kiosks, open-air markets or traditional stores. Just 30% of the country's retail sales are generated by modern chains. The fragmented nature of the market should provide expansion opportunities for both domestic and foreign chains - through both organic growth and M&A.

X5 has been busy on the acquisition front in recent months, snapping up discount chain Ostrov. Elsewhere, another Russian retailer, O'Key Group, has set out plans to list on the London Stock Exchange to raise funds for expansion.

And, as you might expect, the will-they-won't-they question of Wal-Mart's entry into Russia remains live. Every few months, speculation emerged that Wal-Mart is ready to enter Russia but the US retail giant has yet to take the plunge. On Friday (15 October), reports in Russia said Wal-Mart had resumed talks to buy discount chain Kopeika, a company it has been linked to since 2002 and which notably is now also a target of X5.

There remains significant medium-term potential in Russia's retail sector. But there also remains significant hurdles, not least in terms of transport infrastructure and the threat of regulatory interference.

And, with Russian consumers remaining cautious as the country's economy staggers out of recession, it is not time for retail watchers to proclaim the return of buoyant, profitable growth. Not just yet.

This article was originally published on just-drinks sister site, just-food.com. Dean Best, the article's author, is managing editor of just-food.