Articles / Rubric: Companies and Markets

Shadow Economy Interferes with Online Trading
May 2013 | Companies and Markets

Despite the lack of clear rules and the poor transportation infrastructure, the Russian e-commerce market is quickly growing and attracting investors. Yet most are nowhere near attaining profitability because of the interference of the gray market.


Success Stories
The Bay.Ru company entered the Russian market in 2007, facilitating more than $3 million of investments there at various stages. This money was invested by both investor angels and the company’s own principal shareholders.

“For now we’re only doing business in Russia, but as there is demand for goods from abroad in Ukraine and Kazakhstan, we don’t see any problems meeting that demand,” said Bay.Ru Director Maxim Andryukhin.

According to him, 95% of the time, the company imports goods from the United States; it also supplies goods from China, Hong Kong, France, England, Germany, and other countries. Most of their sales are in Moscow and St. Petersburg, but the other regions aren’t far behind: Sales have been increasing in Yekaterinburg, Krasnodar, and Rostov-on-Don. The average sale is $350-400.

Bay.Ru plans to help American retailers enter the Russian market, and is in negotiations with several large chains that sell auto parts, clothes, and shoes. “We would like to establish close ties with clothing store chains like Bloomingdales and Macy’s. They have their own online stores, but they don’t ship outside of the U.S. They might be interested in partnering with Bay.Ru,” added Andryukhin.

Bay.Ru has reduced its fees for both VIP clients and regular customers. The fee for regular buyers has been lowered to 9%. Andryukhin is happy to say that “this is one of the lowest fees on the Russian market.”

He adds that “not long ago, we introduced a maximum cap of a $150 commission, meaning that even if the goods were worth $100,000, the commission would be $150. This is great for those who want to purchase something expensive, but can’t pay the high fees.”

Bay.Ru has also introduced a service called “Addressed to the U.S.” More advanced clients can now purchase items from any internet store, but the seller doesn’t ship the goods. He sends them to a warehouse in Chicago and from there Bay.Ru sends it to Russia.

Bay.Ru has shown good results ever since it entered the Russian market. In 2007, there were 10-15 people working with them, but now there are more than 120 at the main office in Chicago and at Bay.Ru in Moscow. “We are one of the few companies that have managed to turn a profit. Today, we no longer depend on investors. This year, Bay.Ru plans a $70-75 million turnover,” says Andryukhin.

The world’s largest marketplace, eBay, has begun to conquer the Russian market, which has become one of its  priority markets. In 2010, the online auction site launched a Russian version, ebay.ru. The company opened a branch office in Russia in 2012, though eBay’s popularity in Russia was already quite large.

Last year, the number of eBay users in Russia grew 75% and turnover exceeded $400 million. More than 30,000 orders are delivered daily to Russia. eBay’s main advantage is the huge selection of tens of thousands of items. No offline store could accommodate such an inventory. The second advantage is the relatively low prices.


This year, eBay launched a Russian-language version of its eBay.com site. “It will provide Russian customers with a wide selection of items from around the world at competitive prices, and offers a convenient view by category, a search function, and a description of the item in Russian,” explains the CEO of eBay Russia, Vladimir Dolgov. “Launching a site in Russian demonstrates eBay’s deliberate and serious strategy for entering the Russian market.”

eBay also has its own app for smartphones and has introduced the new eBay Fashion mobile app in Russian, which is one of the most populate apps at the Russian AppStore.

eBay is a unique resource For Russia. As CEO Dolgov says, it currently has no direct competitors, as it is the only service offering goods from private sellers abroad in an auction format.

“Our main goal is to let as many people possible know about eBay. There are about 60 million internet users today in Russia and 20-25 million of them buy things online,” Dolgov said.

One of the distinctive features of eBay is the c2c (client-to-client) format, where private sellers find private buyers. In the online auction format, the seller lists a starting price and a time frame for bidding. Items can also be purchased at fixed (“buy now”) prices.

eBay doesn’t just help find buyers, but also deals with the transfer of money and shipping, offering a guarantee for both payment and shipping. “Sometimes items simply don’t get delivered or arrive damaged. In those cases, eBay refunds the money to the buyer and seller, if the damage to the item wasn’t their fault,” Dolgov explains.

eBay’s proven business model was used by the creators of the internet retailer Wikimart. In 2008, project founders Maxim Faldin and Kamil Kurmakayev decided to bring in a few big-name investors instead of just one huge one. The founders of the online sales center had more than 300 meetings in Silicon Valley, looking for investments. Their first investor put up $100,000 in exchange for 5% of the company. More than $700,000 was raised from 20 investors who work for companies such as eBay, Skype, and Facebook.

In 2012, hedge fund Tiger Global Management and a Russian partner fund that requested to remain anonymous, invested $30 million into developing the Wikimart.ru trading platform. Others who invested in Wikimart include the founder of the online ticket buying platform Stubhub, Jeff Fluhr; former Vice President of Facebook, Chamath Palihapitiya; and many private investors.

There are now more than 4,000 shops on Wikimart and more than 200,000 people visit the online shopping mall. The company’s revenue is $110 million.

New Players
Success stories of start-ups on the Russian market are encouraging to foreign companies. The Chinese internet store Alibaba is now planning to enter the Russian market, through its partnership with the QIWI group. Customers are now able to pay for their purchases using QIWI Wallet. The company is also in talks with Yandex.Dengami, which is already working with several Chinese internet stores. Alibab intends to aggressively seek partners, including making agreements with social networks.

The Russian online retail market has also turned out to be desirable for the company Oodji, which decided to open an internet store in Russia, choosing ASSIST as a payment partner. And at the end of last year, the news broke that the largest British online shop, Asos.com, is planning to open in Russia. It is possible that Asos will buy out a small, local player.

Foreign payment systems are making their way to internet retailers and gradually assimilating into the market. In 2012, PayU came to Russia, registering as a legal entity. In January of this year, the company released a report summarizing the results of its first year of operations in the country. Among the services PayU offers in Russia are modules for making direct payments to online stores by text message.

The PayU service allows stores to offer consumers all of the popular payment methods, including electronic payment systems, payment terminals, and bank cards such as Visa Electron and Maestro. PayU also allows stores to accept payment from Alfa Bank clients through the Alfa-Click internet banking system; it also supports mobile payments.

Yet another PayU service is a business protection program, by which large and medium enterprises can transfer a portion of their staff functions involved with payment security to the specialists at PayU.

But the most important thing PayU has brought the Russian market is the buyer protection program, which affects purchases by down payment. Customers can receive a return of the down payment if they change their mind about the purchase. “This program is unique in that it reduces the psychological barrier to paying online for a lot of customers,” said Elena Orlova, the General Director of PayU in Russia.

She says the company faced a few challenges as they were about to enter the Russian market. “We decided to come to Russian in 2011 when we received our status as a legal entity, and began building up operations. At the very same time a law was passed that regulated the operations of individuals transferring goods through internet stores, of various suppliers of goods and services. This caused difficulties because of the need to get a license from a non-bank credit organization, as dictated by the law. PayU had to spend several months getting this license in Russia. This is the biggest difficulty – our bureaucracy and the long amount of time it takes to deal with each case,” complained Orlova.

At the end of last year, the American Discover payment system set out to conquer the Russian market. It closed an agreement of cooperation with Russia’s Standard bank, which is supposed to promote Discover’s card products. The new products are designed for the Russian middle-class segment.

PayPal, which is owned by eBay, is also making its way into Russia. It has finally registered its subsidiary PayPal RU with charter capital of 18 million rubles. PayPal is currently waiting for licensing from the Central Bank. The regulator has received all required documents from the company and has forwarded them to the tax authorities for registration as a legal entity.

This means that soon, the Russian service will be able to work on the Russian market. The arrival of PayPal will mean that Russians will be able to do more than buy goods and pay for them with PayPal accounts, which was possible previously by linking a bank card to the buyer’s PayPal account.

The big innovation is the ability to receive payments, including from eBay. Experts believe that the company will begin to invest more confidently in the regional areas of Russia.

Investing in the Future
The Russian e-commerce market is very attractive now for investors, such as the Swiss private equity fund Pluribus Optimum. The company announced plans to invest €100 million by the end of 2015 in e-commerce projects, processing, document management, organization of billing and payment for the online trade, and 3PL logistics, in Russia and the Commonwealth of Independent States.

Pluribus Optimum management is planning to invest in 20-25 projects in Russia over the course of three years. In order to do so, the Fund is getting ready to launch a full-fledged representative office in Russia in the near future, through acquiring control of a market player. The company forecasts that the Russian e-commerce market could reach $30 billion by 2015.

A study done by the Boston Consulting Group shows that e-commerce is expected to triple in volume by 2016. The share of e-commerce in Russia’s internet economy will reach $43 billion in three years.

“Russian e-commerce is growing year after year and the transactions that are publicly disclosed total in the hundreds of millions of dollars a year. However, almost all the projects that have attracted large investments have yet to become profitable, with almost all of them below the break-even point. For now, it’s all investment in the future,” says Elena Orlova.

“Very large sums were invested in projects that launched several years ago, but recovering the initial investment is still a long way off,” agrees Maxim Andryukhin. “Investors want to be very sober about their investments. They don’t expect amazing results, just actual income.”

President of the Associations of Internet Trade Companies Sergey Rumyantsev noted that it is mostly venture capital that is being invested in the Russian internet trade. These people are used to risk. “The internet trade market isn’t transparent enough. Another problem is how expensive the infrastructure is, and there isn’t enough money for its development.”

“Gray” companies interfere with the attraction of foreign investments to the Russian e-commerce market, adds Wikimart founder Maxim Faldin. Moreover, it’s very difficult to obtain loans in Russia. Internet companies have nothing to put up as collateral except their products.

Faldin concludes: “But the biggest barrier is customers’ trust. As soon as consumers regain trust in the internet, e-trade will grow 2-3 times. Foreign companies will begin to really invest in this market.”

Text: Vera Kozubova


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