Korean Businesses Ride Russian Economy

For Moscow shoppers checking out the newest electronic gadgets in Russia, a stroll down Renin Street is all that's needed.

There, in one of the most affluent areas of the capital, a lineup of billboards provides an inventory of Korean products ranging from mobile phones with built-in cameras to home-theater systems.

The street scene is indicative of the sturdy presence of Korea's conglomerates, who entered the Russian market soon after the establishment of diplomatic ties in 1990.

Their expansion to the former-Soviet bloc nations didn't stop even when many Japanese companies called off further shipments in the wake of Russia's 1998 financial crisis.

After more than a decade of efforts to build up brand recognition among Russian consumers, Korean electronics makers and carmakers are enjoying a sales bonanza in Russia where the economy is booming on rising international oil prices. Last year, the Russian economy grew 7.3 percent, bringing cumulative growth since 1998 to 38 percent.

"Things have changed a lot. Check with any local store. You'll find our products on top shelves, which used to be overshadowed by Japanese and European products before," said Shin Dong-pyo, chief representative at the Moscow office of the Export-Import Bank of Korea.

Russia's purchasing power parity – an adjusted measure of per capita gross domestic product – exceeded $9,000 last year, according to the International Monetary Fund. It was less than $6,000 in 1998 when the country declared a moratorium on short-term debt.

"The nominal average wage in Russia is only $3,000. But it's noticeable that disposable income is high because the cost of living is traditionally low in the former communist nations," said Kang Seon-gu, a senior economist at LG Economic Research Institute.

According to the Institute of Complex Social Research at the Russian Academy of Sciences, almost 50 percent of Russians regarded themselves as middle class last year against 29 percent in 1998 before the infamous default.

Russia's economic recovery, which many economists say is the strongest in nearly a century, has stimulated purchasing power of the emerging middle class in Russia with a population of 144 million.

That has created demand for high-technology products. Russia's electronic appliances market excluding computers is estimated to have reached $8 billion in 2003, 31 percent up from the previous year, industry experts said.

Samsung Electronics Co., which set up operations in Russia in 1990, has blazed a trail for Korean exporters eager to expand their foothold on the Russian market. "As a first mover in the Russian market niche, we've had the best chance of cornering that market," said Eun Joo-sang, managing director of Samsung Electronics in Moscow.

The company has succeeded repositioning itself in the upscale market segment in Russia. Samsung, for example, no longer sells conventional cathode-ray-tube monitors with curved screens in Russia. Eun claimed it has beaten Panasonic and now is on par with Sony Corp. in terms of brand recognition among Russian consumers.

Samsung expects its sales in Russia will surge to 3 trillion won ($2.55 billion) this year, compared to 1.7 trillion won last year, fueled by strong sales of cellular handsets, televisions, refrigerators and printers. Russia is one of Samsung's six strategic exports markets.

In an effort to promote their brand images among Russian consumers, Korean electronics makers have been aggressively pushing cultural marketing. Samsung, as a major sponsor, has spent $500,000 since 1996 on the renovation project of l'Hermitage in St. Petersburg.

LG Electronics Inc. has been hosting festivals including performances of Russian folk dances and a family singing contest in 14 major cities in Russia and other Commonwealth of Independent States such as Kazahkstan.

"Our cultural marketing will help us gain trust among Russian consumers who pride themselves on their national heritage," said Jung Suk-joon, general manager at LG Electronics Moscow. Company executives say Russians tend to be wary of foreign businesses who they believe only care about making profits.

Their efforts have paid off. Last year, five products made by the two companies including DVD/VCR, home-theater systems and air conditioners were selected as "Narodnaya Marka," or national brands.

The Russian government awards the titles to the most popular consumer goods in 20 categories and the products selected as national brands may use the Narodnaya Marka logo in their advertising and packaging for two years.

Korea's largest automaker, Hyundai Motor Co., has recently moved its regional headquarters to Moscow from Poland. Company officials expect that the Russian market will be a critical starting point for its expansion to Eastern Europe, which is one of the most rapidly growing automobile markets in the world.

"Russia is on fire. The pace of sales growth of imported cars is astonishing," said an official at Hyundai Motor Moscow. Hyundai has sold nearly 10,000 cars through April, taking up 11.1 percent of the market. That has placed the company at No. 2 on the market, after Toyota Motor Co. of Japan. Hyundai officials forecast the company will sell 35,000 cars this year, more than double the sales last year.

The official said the company is looking into a plan to take over another assembly plant. Currently, around 40 percent of cars sold in Russia are assembled there.

"Although Russia accounts for only 3 percent of our total overseas sales, it is certainly one of the most promising markets with great growth potential," he said.

"Korean businesspeople have an edge over their global rivals because they've been there for a long time. It should be much easier for them to do business by the time Russia joins the World Trade Organization," said the economist Lee.