Logistics

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.

Population:

144.3 million

GDP:

$1,283.2 billion

OECD Risk Score:

4