Russian Market: Fundamental Changes, New Opportunities and Far-Reaching Plans
In 2022, imports from Western countries significantly decreased in Russia. At the same time, the quality indicators of the Russian market itself have not changed. Demand has remained at the same high level, which now cannot be fully satisfied.
Russia with its annual imports of $304 bln and population of 145 mln remains the largest country in the world. Let’s reveal insights into three opportunities that foreign companies can take advantage of on the Russian market. We are going to discuss the prospects for the development of markets of heating, water supply, sewerage and swimming pool equipment together with leading experts.
Eastern Countries Explore the Russian Market
Nowadays the Russian market is like a goldmine for those who are ready to work on it. Under the current circumstances, ample opportunities open up for foreign partners who have not yet entered or are just starting to work on the market. Though being a real challenge for Russia, withdrawal of European companies has also opened up new prospects and opportunities. Recent months have been marked by such trend as growth of supplies to the Russian market from the following eastern partner countries: Turkey, China, Iran, India and others. Vacant market niches previously occupied by European companies provide an excellent opportunity to ramp up exports and revenue. These opportunities are already actively employed by business representatives from eastern countries.
Mr. Yuri Tabunschikov, President of AVOK Non-profit Partnership, scientist and holder of Advanced Doctorate in Technical Sciences, comments on the prospects for foreign companies in the Russian market. The expert emphasises one important trend that has emerged since February: many components are now supplied from China. Turkish companies are very focused on the Russian market. AVOK Non-profit Partnership has been in contact with Turkish associations of manufacturers of heating and ventilation equipment for many years. They often stated their strong desire to enter the Russian market. "Now they got such an opportunity, and there is active trade with Turkey," concludes Mr. Yuri Tabunschikov.
Iran also has an opportunity to develop greater economic ties with Russia. Mr. Andrey Balog, editor-in-chief of BANBAS portal and magazine, emphasises that Iran, which has been under sanctions for 30 years, has developed and established its own production, since it is difficult to import anything from abroad. The expert reports that while Iranian products are not widely represented on the Russian market, they will soon appear on it. We might also observe interesting developments concerning Uzbekistan. Foreign countries, including European ones, are actively investing in its industrial development. They can exploit Uzbekistan as a loophole to trade with Russia, i.e. to import products made in Uzbekistan. Low-cost labour, energy and reliable legislation play into the hands of the Middle Eastern partners.
Opportunity No. 1. Shortage of imported equipment and components
One of the main opportunities that foreign partners can take advantage of in the Russian market is the obvious shortage of equipment and components caused by suspension of European supplies. Now that there is a serious shortage of spare parts, their stocks are gradually running out. About 10 million domestic heating boilers of foreign origin are operated in Russia. There is already a shortage of spare parts for some of the most modern and reliable models. Therefore, condensation boilers of many European manufacturers may soon be in need of proper maintenance. Foreign companies that have decided to stay in Russia under a new brand are also facing a shortage – they have also been affected by problems with components.
Mr. Stanislav Mityushin, General Director of GIGO Association, provided details on the problem of shortage. According to the expert, such commodity shortage is largely associated with vacant market niches left by departing Western companies. Niche products, especially wall-mounted boilers, single-circuit and condensation boilers, are in considerably short supply. This results in an increase in private demand, an increase in grey suitcase trade. There is a manifold rise in prices for these disappearing positions. Supplies from China provide for gradual solution of these problems with spare parts shortage: spare parts produced there can also be used for European boilers. The expert places particular focus on the problem of automation modules and electronic segment which are difficult to replace with supplies from China, since there are no ready-made replacement solutions. Chinese manufacturers are rushing to fill the Russian market. They are ready to satisfy the needs for spare parts for other brands and to supply Russian production facilities. Domestic manufacturers of domestic gas boilers do not lag behind foreign companies.
The interviewed experts and industry professionals, i.e. founders and directors of engineering, trade, construction companies, also confirm the shortage of equipment and components. They outline the current state of the Russian market as follows:
- “There are some problems with swimming pools, it is widely stated that there is a shortage of filters and, in particular, high-quality chemical products for cleaning and water treatment.”
- “As for sewage, there is an acute shortage of pumps, agitators and crushers. Companies that used to cooperate with Danish and Swedish manufacturers are now looking towards Turkey”.
- “There is obviously a shortage of heating, gas, air conditioning equipment. German boilers and radiators are in short supply”.
- “It stands to mention insufficient number of general-purpose automation products: automation and control equipment used to transmit data to operations control centres”.
- “Supplies of European pneumatic actuators, valves and fuses have become problematic”.
- “There is a shortage of everything that has been sanctioned. These are, for example, pressure reducers and pipe systems from popular European brands”.
- “Of course, we face a shortage of goods, especially certain groups of us. Plumbers and engineers who service homes are used to working with certain brands. Many of them have left Russia”.
The specialists also shared their vision of the prospects for the products made by the companies from Eastern countries in the Russian market:
- “We would like to see Iranian products, they probably have a lot of good equipment. We have been cooperating with Turkey since last year, and we deal with China on a constant basis. But not with Iran, I would like to see their products and technologies”.
- “Products from partner countries are very likely to gain success on the Russian market. Considering that half of the European heating products consist of Turkish and Chinese components, the question arises as to the expediency of sales to Europe if you can produce it yourself and immediately supply it here?”.
- “I think that any crisis offers some import substitution opportunities. Products from Turkey, Iran, China, and India have exciting prospects on the Russian market. Uzbekistan offers good mixers, for example, Lemark. Some products are already being supplied from friendly countries”.
- “Eastern manufacturers have every chance to secure their foothold in the Russian market for a long time. Turkey and China produce good products having an acceptable price/quality ratio. Iran makes high-quality corrugated and polyethylene pipes, outdoor networks”.
Opportunity No. 2. High exchange rate of Russian rouble
The strong rouble and the high cost of domestic metal products have a negative impact on Russian production. By now the rouble has strengthened against the dollar by 19%, as compared to January-February 2022. Consequently, Russian heating equipment is becoming less competitive both in the domestic and foreign markets. According to the Eurasian Heating Systems Market Association (EURAROS), imported equivalents, in particular, from Turkey and China, are cheaper than Russian ones by 18–22%. Against this background, 57% of the companies surveyed by the association expressed concerns that they would have to reduce their production volumes. Another 14.4% admitted that they might have to reduce the quality of products in order to maintain their current value and competitiveness.
In the current situation, some heating equipment manufacturers ask for restoration of export subsidies. Aluminium and bimetallic radiators will not be able to compete with radiators of European and Chinese origin without such subsidies. Thus, high rouble exchange rate has ensured a significant price advantage for Eastern equipment manufacturers in the competition on the Russian market.
Opportunity No. 3. Government projects stimulate domestic demand
Federal projects associated with gasification, water supply, and housing construction are in progress in Russia. The achievement of development goals involves the acquisition of millions of units of core products. These include gas boilers, heat exchangers, heating radiators, water cleaning and treatment systems, control and measuring devices, pipes, valves, fittings, etc. In the course of projects the requirement for such products will only increase. Domestic demand will increase and could be met by Eastern partners after withdrawal of Western companies from the Russian market.
In 2021, another five-year plan of PAO Gazprom for gasification of Russia was launched. By 2025, it is planned to lay 24 thous. km of new gas networks, to gasify more than 538 thous. households and apartments in 71 regions of the country, and complete the technically feasible gasification of 35 regions. Hundreds of thousands of units of heating equipment are required for the successful implementation of the program. In particular, it is referred to gas boilers, the demand of the Russian market for which is 1.5–2 million units per year. For example, in 2021, the first year of Gazprom’s five-year plan for gasification, positive dynamics was observed in the boiler equipment market, for the first time in a long period.
Another state program that multiplies domestic demand for heating equipment is the Federal Housing Project aimed at a considerable increase in the volume of housing construction. By 2030, it is planned to reach construction volumes of at least 120 million m2 per year. In total, about 1 bln m2 of housing will be built by 2030, which will require heating and water supply systems. Significant demand for water supply and sewage equipment will be supported by the Federal Project “Clean Water”. The key objective of the project is access to high-quality potable water for 5 million people. More than 2.2 thousand facilities will be upgraded, which will require hundreds of thousands of units of core equipment.
Prospects of Heating Equipment Market
Mr. Stanislav Mityushin comments on the current and expected situation on the heating equipment market in Russia. According to him, the market situation is relatively quiescent now, there is no consumer panic. The observed shortage of certain categories of equipment, which, by the way, appeared in the middle of 2021 due to short deliveries caused by global shortage of semiconductor products, is not critical. The equipment that will fail without Western spare parts will be replaced by equipment of Turkish, Chinese and domestic origin. Crisis in logistics and supplies creates an interesting market situation: a Turkish, Chinese or domestic boiler, similar to a European one, can be even cheaper than one spare part for certain European brands. The expert is confident that investors and manufacturers now have a real chance to occupy the vacant niches. And they don’t even have to capture them, they just need to occupy them.
“Foreign and domestic suppliers and manufacturers have enormous prospects in the Russian market,” says Stanislav Mityushin. Moreover, he recognises the specifics of the Russian market. It manifests itself in the fact that there is a demand for inexpensive and structurally traditional equipment, such as cast-iron boilers, on the one hand, and for high-tech modern condensation boilers, on the other hand. As a result, the middle class of equipment falls out. Success in the Russian market will depend on the products the foreign manufacturers and suppliers are ready to offer. We should also bear in mind that Russian domestic gas heating equipment market has relatively small capacity. The annual demand of the gas boiler market is 1.5–2 million. In any case, the current Russian market of heating appliances shows both demand and shortage in certain niches.
Prospects of Water Supply and Sewage Market
Mr. Aset Aubakirov, Director of the Association of Water Companies, spoke about the prospects of the water supply equipment market. In his opinion, such Federal projects as “Clean Water”, “Protection of Lake Baikal”, as well as the requirements of other industries, create a steady demand for equipment and materials for water supply and sewage. “Foreign manufacturers and suppliers who have decided to leave the Russian market have little chances to return, as the generated demand will be met by other manufacturers”. The expert gives a typical example stating that “the supply of Chinese CNP pumps to the Russian Federation has increased by more than 10 times, thereby fully satisfying the demand for some items of pumping equipment”.
In the expert’s opinion, the economic sanctions imposed against Russia have had an impact not only on investments in the development of water supply and sewage infrastructure, but also on the supply of foreign equipment and components. The world’s largest manufacturers of pumping equipment, components and chemical materials for water treatment, power electronics have ceased or limited their supply of equipment and materials to the Russian Federation, which resulted in a decrease in imports to the Russian Federation by all modes of transport by 67%. The expert emphasises severe import dependence of the water supply and sewage industry. Thus, the imports of equipment and components for 2021 amounted to $1,732 million. A significant decrease in imports caused an acute shortage of a certain category of materials and equipment.
Prospects of Swimming Pool, Bath, Spa Market
Mr. Andrey Balog shared his opinion on the Russian market of swimming pools, baths and spas. Prior to February 2022, the share of imported products on the Russian swimming pool market reached 70–80%. The core participants of this market were Germany, Sweden and the Czech Republic. It was they who left the market the first, which caused the need to change the product supply channels. Spanish and Italian companies are still operating on the Russian market. Almost all foreign manufacturers of swimming pools that had subsidiaries in Russia remained. Thus, the swimming pool market was heavily dependent on imports, unlike the bath and sauna market. Bath business almost completely consists of Russian-made products, as well as glass and wood ones.
Regarding the swimming pool market, the expert notes acceleration of imports from Turkey and China. Their advantages include cheap labour, small and flexible production. Turkish production is geared for export, in principle. The only obstacle left is the fact that Russia and Turkey have not yet adopted a single payment model in RUB and still use USD.
Mr. Andrey Balog is sure that the market of swimming pools, baths and saunas has exciting prospects in Russia. The market has two powerful growth drivers. The first driver is that large amounts of money are now concentrated inside the country, where they will be spent, including as investments placed by wealthy citizens in real estate. Another industrial driver will be the development of domestic tourism. A bathhouse, sauna, spa centre or swimming pool are often built at new glamping sites, in hotels, resorts, water parks and other tourist places.
Aquatherm Moscow Exhibition Offers the Key to Success on the Russian Market
The exhibition format allows you to announce yourself in a new country and increase your exposure on a market where the company has not worked yet. The exhibition brings together not only leading manufacturers and service providers, but also thousands of visitors that are potential buyers of products. Visitors come to see goods and services with their own eyes, to study new offers from manufacturers, as well as to procure the required engineering equipment for their companies. The exhibition allows you to complete all these tasks in just a few days and at a single location.
Aquatherm Moscow is the largest Russian exhibition of integrated engineering solutions for heating, water supply, sewerage systems and swimming pools. In 2022, the exhibition was arranged within an area of 13,178 m2 and was attended by 640 manufacturing and trading companies of engineering equipment from 22 countries. 17,907 guests visited the exhibition, the vast majority of whom (94%) influenced the decision-making on procurement of displayed products.