E-commerce penetration rates in Russia have lagged global and emerging market peers, historically, as the market faced challenges caused by the sheer geographical size of Russia and its fragmented population. As a consequence, large investments in fulfilment centres and infrastructure were required to support sector growth and help nurture consumers’ behaviour towards e-commerce. 
Despite these challenges, there are reasons to believe that the market may be close to a turning point. The country now has the required infrastructure in place to enable growth, and as the digital economy matures, consumer behaviour is changing. Furthermore, the announcement of a number of high profile partnerships in 2018, including Aliexpress, the joint venture between Alibaba and Mail.Ru will help to drive the sector forward.
Enabling growth via infrastructure and consumer behaviour
Historically, the infrastructure required to efficiently deliver to a dispersed population presented a challenge, however the evidence today suggests this is being overcome. Russia’s 80 per cent internet penetration is higher than China and smart phone ownership at 65 per cent, is on par with most emerging market peers.
Despite this, e-commerce in Russia currently makes up just 2 per cent of the total retail market (excluding intangible merchandise), the stands in stark contrast to China and Brazil, where e-commerce penetration is substantially higher, at 17 per cent and 5 per cent respectively.
Market structure: lack of a dominant player
Traditionally, countries with a more established e-commerce sector normally have one dominant player. For example in the US, 63 per cent of e-commerce sales are generated by the top five players, with Amazon alone representing 49 per cent. Likewise in China, the top five players account for 83 per cent, with Alibaba making up 57 per cent of the market. In contrast, the Russian market is highly fragmented, with the top five accounting for only 27 per cent of the market, with the two largest players Yandex Market and Alibaba’s Tmall, each taking 10 per cent share.
The fragmented market in Russia presents an opportunity for one player to dominate, like Amazon in the US and Alibaba in China, and with some analysts estimating that the revenue opportunity for the market leader could be up to $10bn within the next 10 years, the potential is significant.
Domestic vs cross border growth
To capture this opportunity, companies will need to grow either domestically such as Ozon, where the order and fulfilment, including last mile delivery, happens in Russia or via cross border trade, where orders are fulfilled outside of Russia and delivered via national operator Russian Post.
China dominates cross border volume, accounting for 90 per cent of purchases, with the majority of transactions taking place via Alibaba’s Chinese platform Tmall. Despite making up the lion’s share of volume, Chinese cross border trade accounts for only 50 per cent of transactions by value. This trend for lower priced items is important; it forms habits for online shopping and attract new investments into the sector.
The market moving forward
As the market grows and funding increases we recognise the potential for a market leader to emerge. It is our belief that either Yandex or Mail.Ru is best positioned to capitalise on this opportunity.
Yandex, via their joint venture with Sberbank, operate Yandex Market and have recently launched a separate e-commerce platform Beru. This partnership has the potential to offer substantial benefits. Yandex, via their Search platform, can drive traffic towards their e-commerce offerings and Sberbank have the ability to provide the financial backing for future investment.
Mail.Ru’s joint venture with Alibaba benefits from Alibaba’s experience in e-commerce whilst leveraging consumer data from Mail’s 90 million users to target customers more effectively and grow the platform by increasing the complexity of the product offering and possibly the basket size.
Despite these partnerships, questions remain over the future path of the industry. Yandex Market has been unable to grow its platform away from its core business as a comparison website and it is uncertain that state-owned Sberbank can tolerate sustained monthly losses without damaging public opinion.
It also remains to be seen whether firms will invest in fulfilment centres or if the larger players, such as Aliexpress, will build on their cross-border strength and aim to boost revenue.
Looking ahead whilst challenges remain we recognise that the foundations are in place for companies to take advantage of the market opportunity in a sector which is poised for growth.
Adnan El-Araby is investment manager on the Baring Emerging Europe trust. All views are his own and should not be taken as investment advice.