15 June 2007
Russia's Rising Middle Class Fuels Domestic Consumption
Hot Growth Market for Hong Kong says New TDC Study
"The size and purchasing power of Russia's middle class has been on the rise since Russia's economic rebound following the 1998 financial crisis," said the TDC's Chief Economist Edward Leung.
The country's economic performance has been impressive, thanks to the continuous growth in oil prices and a stable political environment. Russia's foreign reserves surged from US$12 billion in 1998 to about US$300 billion at the end of 2006. Its GDP has risen at an average rate of 6.4 per cent per annum since 1998, against the four per cent average of Central and Eastern Europe. Real GDP growth is expected to remain steady at 6.5 per cent in 2007, the same as last year.
Russia's strong economy drives income growth, which, in turn, supports the country's booming domestic consumption. Today, about 30 million Russians - 20 per cent of the population - earn a middle-class income. Most are located in Moscow and St Petersburg, the two largest cities in Russia.
The TDC study estimates that the population's income ranges from US$700 to US$1,500 a month. Russians enjoy high disposable incomes, given relatively low household expenditures. Since 2001, a flat rate of 13% in personal income tax has been levied. Now, housing and utilities only account for 10% of Russians household incomes, which is the lowest among Central and Eastern Europe.
Russians are willing to spend more money to improve their quality of life. The potential for exports of Hong Kong consumer electronics, household appliances, clothing, footwear, toys and games, sporting goods, gifts and premiums, timepieces and jewellery, building materials and hardware, houseware and furniture are promising, says the TDC study.
While there is increasing awareness of brands among Russians, value-for-money products remain the prime choice for most Russians, particularly the middle class. More Russian consumers are now buying from modern retail outlets, such as shopping malls, independent shops, retail chain stores, department stores, hypermarkets and supermarkets.
It's a golden opportunity for Hong Kong companies to target Russia's emerging middle class with value-for-money brands, characterised by good product quality, affordable prices and European styling.
Since "made in China" goods are generally associated with a negative image, however, brand differentiation is essential. A "made by Hong Kong" label is recommended to distinguish Hong Kong products from mainland offerings.
Russia's buyers are increasing their sourcing from Hong Kong and the Chinese mainland. Given Hong Kong's professional management skills, quality control and provision of customised sourcing services, it has the opportunity to become a major sourcing centre for Russian buyers.
Hong Kong's exports to Russia increased by 15 per cent, to US$578 million, in 2006. Russia is Hong Kong's third-largest market in Central and Eastern Europe, after Hungary and the Czech Republic. There is enormous room for further growth, as Russia is by far the most populous country in the region.
As Russia is still in the early stages of trading with Hong Kong, the TDC report advises Hong Kong entrepreneurs to take the initiative in developing closer relations. "Hong Kong companies should be flexible in accommodating the needs of Russian importers and traders for small orders. They should also consider giving credit to Russian buyers with a favourable track record," Mr Leung said.
The study notes that customs clearance remains the major challenge for Hong Kong exporters to Russia. Hong Kong companies should have their Russian counterparts or customs brokers in Russia handle custom issues.
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Established in 1966, the Hong Kong Trade Development Council (TDC) is the international marketing arm for Hong Kong-based traders, manufacturers and service providers. With more than 40 offices worldwide, including 12 in the Chinese mainland, the TDC promotes Hong Kong as a platform for doing business with China and Asia. The TDC also organises trade fairs and business missions to connect companies with opportunities in Hong Kong and the mainland, while providing information via trade publications, research reports and online. For more information, visit www.tdctrade.com
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