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Russia Trip Report - Economic Insights and Other Titbits (Part 4)
Tales from the supermarket aisles: import substitution, the cashless economy and accessing Russian equities as a foreigner
In late July/Early August, Altraman spent two weeks in Moscow, the capital of Russia. In this instalment, his explorations of the city's vibrant supermarket shelves, alongside the seamless integration into the local banking system, shed light on the alluring advantages awaiting foreigners who dare to embrace the intersection of commerce and financial accessibility.
This is the final piece concluding a four-part Series covering Altraman’s recent trip to Moscow from Hong Kong, during which he uncovered many ground truths about the economic situation there, as well as insights into the workarounds being used to keep businesses open and money flowing amidst increasingly hostile sanctions. Few aspects of life in Russia appear untouched by the current geopolitical climate, which was evident even during Altraman’s journey to the country. The fourth and final piece in this series explores the changing selection at local supermarkets, ease of plugging into the local banking system, as well as the benefits of doing so as a foreigner.
Local supermarket shelves speak volumes on consumer habits and geopolitics
Stocking up on groceries at the local supermarket provided a few interesting insights into how the country is re-adjusting to a significantly restricted international food supply chain. Russian people do love their dairy – typically found to be the biggest section in most of the convenience stores and supermarkets there. This is not a big surprise as Russia is one of the biggest dairy producers globally. The milk market generated around USD 6.2 billion in 2022 and is expected to grow annually by 7.47% (CAGR 2023-2028). As a result of EU sanctions enacted in 2014, Russia is now largely self-sufficient in meat and dairy production, meeting over 100% and 90% of domestic demand, respectively.
Even before 2014, Russia began substituting food imports with locally produced goods and sourcing from friendlier countries in Asia, the Middle East, and even South America. Despite these countries being net exporters of these agricultural goods, their own imports from Europe shot up at the same time in a strong indication that they were re-routing goods to Russia.
Russian diets are generally quite healthy, so it was also no surprise to see less junk food and soft drinks on shelves relative to Asian and Western counterparts. Post-sanctions, foreign brands are less prominent, but do exist. Most notably, popular soft drinks, i.e., Coca-Cola appear to be imported/re-routed through Russia’s trading partners Iran and Turkey.
A local iteration of Coca-Cola, also exists called Dobry Kola (Добрый кола), which is produced from former Coca-Cola production facilities in Russia. However, the London-based operating entity of Coca Cola in Europe-Russia "left the market" in March 2022. This company, Coca Cola HBC (CCH.L) simply transferred its assets to a local juice company it had purchased in 2005 - which happens to bottle Dobry Cola. In August 2022, Coca-Cola HBC revised its annual profit guidance upwards after posting strong results. Operating profits more than doubled to GBP 480 million (USD 586 million) in H1 2022. Coca-Cola HBC claims its local outfit is a "self-sufficient business" and that it is not involved in local operations. Coca Cola HBC's share price dropped by 43% in March 2022, and has since staged a near-recovery - the cynical investors among us may have seen an opportunity there. By Q1 2023, Dobry Cola had become the best-selling cola in Russia, capturing 34% of the market.
Keeping payment terminals running in a largely cashless economy
With Russia leading most countries in the shift to a cashless society, I kept a keen eye on the local payment landscape as I visited these various retail outlets, given our previous coverage of the payment terminal market. With over 161 million cards in circulation surpassing Russia’s population of over 147 million, it was no surprise to see Russia’s Mir (Мир) payment system become the most viable and dominant domestic payment system as opposed to Visa / Mastercard.
The introduction of Mir was accelerated after the 2014 sanctions, and has become the dominant payment system after Visa and Mastercard (combined 70% domestic market share) left Russia in 2022, representing a USD 1.5 billion annual revenue loss for the two companies. Mir is no silver bullet – since 2022 the US government has put immense pressure on banks everywhere from Vietnam to Uzbekistan to stop accepting Mir-routed payments, meaning Russians still have to jump through significant hurdles when making payments overseas – often carrying large amounts of USD or using bank accounts they set up in neighbouring countries.
As for payment terminals themselves, Ingenico (private) and particularly PAX Global (0327.HK) featured quite prominently during my stay in Moscow. Despite the latter’s winding down of Russia and CIS-related sales, their terminals remained in widespread usage. This is unsurprising as PAX obtained certification for Mir in 2017 and is/was the leading payment vendor for Sberbank (SBER.MM), the largest bank in Russia.
Having spoken to PAX IR, the standard response was that the company does not sell to Russia anymore in compliance with international sanctions. However, I did wonder with so many terminals in play and the replacement cycle occurring roughly every 3 years – who is replacing that void? As we know, Russia is sourcing everything from advanced technology to luxury cars from neighbouring countries, where concurrently imports of such goods from the EU / US have shot up overnight. As PAX themselves note, they have no control over who their distributors sell to, and sales figures are not broken down at a country level. Without any visibility of end customer data, one could speculate that Russia continues to import terminals from third parties, a dynamic we discussed in the first edition of this series.
Plugging into the local banking system?
Interestingly, I encountered a handful of Chinese expatriates at my local supermarket and managed to strike up a few conversations. I was rather curious how foreigners were managing transactions as cash payments were noticeably unpopular there. One Chinese expatriate I spoke to said, like in China, it was very much advantageous to plug into the local payment ecosystem given how many day-to-day transactions are conducted through mobile and card.
Foreigners travelling to or residing in Russia can open a local account with the likes of Sberbank and have a functioning card in hand within the hour. All you need is,
a valid passport;
a notarized Russian translation of the valid passport; and
an entry permit card, which you receive upon arrival.
Depending on the bank manager and branch, you may only need your passport to register for an account, and by luck, you may even find yourself getting a savings account with more than 10% in interest. However, keep in mind that almost all banks are under sanctions, so international bank transfers are impossible and may get you in trouble. At the same time, sanctioned countries tend to adapt and resort to various routes through shadow banking.
Despite China’s UnionPay being less prevalent than I had anticipated, cross border currency conversion is possible (from Yuan to Rubles or vice-versa) though it is not quite a clear-cut process, as Russian “subsidiaries” of the likes of CCBI (0939.HK; 601939.SS) or Bank of China (3988.HK) operate separately to their Chinese entities. I found out that the most popular cross-border transaction mechanism, either to China or the West would be through independent third parties, often operating on Telegram. According to the expatriates I met at the supermarket, there are even WeChat groups operated by cross-border moneymen. For these third parties spread can be up to 40 bps depending on the day – similar to usual banking spreads and makes business and day-to-day transactions possible.
One stand-out feature of the banking offering in Russia was anonymous cash cards, affording privacy to account holders who do not wish for their transactions to be tracked or are particularly concerned about identity theft. Given the entrenched perceptions around Russia as an authoritarian state, I was surprised to see this level of privacy offered to common account holders when such services are rarely offered by banks elsewhere.
Possibility to trade local Russian stocks?
Opening a Russian bank account can also avail one to a brokerage account for the local stock market. Apart from Sberbank and Tinkoff Bank (as TCS Group Holding PLC (TCSG.MM, TCSq.L (suspended)), which do not allow for non-residents of the country to open a brokerage account, there are alternatives for visitors, but these can only be set up in person in the local representative offices. Bear in mind, these services would only be available for citizens of “friendly” countries. These include, but not are limited to BKS (БКС Мир Инвестиций), VTB Bank Capital (VTBR.MM) and Finam Holdings (ФИНАМ), for which you require the following documents:
a valid passport;
a notarized Russian translation of the valid passport; and
a document confirming right to stay in Russia (e.g. visa, entry permit, temporary residency permit, migration card etc.)
tax identification account no. (TIN) for the country you are living in
This appears to be the best option to gain access to the Moscow Stock Exchange as offshore brokers, and even the seemingly dodgy ones out of Cyprus (eg. Otkritie Broker), are under heavy regulatory pressure to divest their Russia links.
This concludes the four-part Series covering Altraman’s recent trip to Moscow from Hong Kong. Despite the imposition of western sanctions aimed at weakening Russia's financial system, it was remarkable to see the resilience of local economy and the workarounds in play as locals adapt to life under sanctions. It is noteworthy that Moscow accounts for over 20% of Russia’s total GDP. I would also be curious to see what the wider economy and life is like outside the capital.
While the trip to Moscow was a personal one with neither investing infrastructure nor company meet-ups in mind, curiosity got the best of me and I’m glad I figured out a way into the market. Although trading volumes fell by 41% yoy in 2022 owing to the exodus or freezing of western capital, the market remains much cheaper than prior to the war in Ukraine. Over the past seven months, the Moscow Stock Exchange has experienced a partial rebound, which bears similarities to the Turkish market (Borsa Istanbul 100) performance despite inflationary pressures. In both cases, some of the gains are helped by smaller shareholders and local retail investors, but also attributable to these governments implementing indirect controls on capital outflows.
This market will likely remain a hostage to geopolitics in the short to medium term, so pushing back to pre-war highs is unlikely any time soon. Having said that, Russian retail and “friendly” foreign investors can continue to reap the benefits of high dividends, high interest rates, and capital gains from select opportunities.
While we would be happy to expand on insights into the Russia market, given that most subscribers won’t have access to this market we won’t be publishing deep dives on Russia-listed companies until the status quo changes. That said, we may very well look into interesting overseas-listed Russian companies or foreign proxies with Russia exposure.