by Valeria Khalina, U.S. Commercial Service

Opportunities in the Russian construction market remain considerable, and the future of the market looks bright.

The Russian construction market continued to grow at an average rate of 10 percent to 15 percent throughout most of 2008, offering opportunities to U.S. manufacturers and distributors. Sector growth was driven by extensive residential and commercial construction across Russia, infrastructural projects and, to some extent, planning for the Sochi Olympics. Until the effect of the economic slowdown became evident in late 2008, experts were forecasting the boom in the construction industry to continue throughout 2009 and 2010.

The economic slowdown has impacted many sectors of the economy, including construction, as it is highly dependent on the banking sector and access to financing. Many developers continue to finish projects that were in the pipeline. However, a number of new projects have been postponed. Overall, construction activity in most Russian cities (St. Petersburg, Krasnodar, Nizhniy Novgorod, Kazan, Samara, Rostov, etc.) has decreased. According to research reports, residential construction has been particularly impacted. Growth slowed from 30 percent in January-October 2007 to just 5 percent in January-October 2008. For 2009, housing output was predicted to fall 15 percent. Recovery in this segment is expected to begin in early 2010.

Despite the slowdown, many developers remain optimistic and continue to look at this market as a tremendous opportunity. For example, Barkli (a Russian construction company) is planning to build a

93 505-square-meter apartment complex. Don Stroy (a large Russian company) is planning to complete the construction of residential complexes with a USD 500 million loan from VTB. The Russian government has plans to invest in the construction of new social housing in the Moscow suburbs. Various projects for the construction of hotels, business centers, ports, resort complexes, and sporting facilities are expected to be completed in 2010. Growth is also expected in individual housing construction. Therefore, Russian companies and individuals will continue to buy building products. Further, smaller remodeling projects for private houses, homes, offices, and hotels continue. There exists a steady demand for some basic construction products.

The construction industry is hopeful that building needs related to the 2014 Sochi Olympics will play a role in the revitalization of the sector. The construction of sports facilities, hotels, and transportation systems has already started in Sochi and the Krasnodar region and will continue for the next five years, creating opportunities for suppliers.

Market data

Some of the basic building materials, such as cement, precast concrete products, glass, wall materials, and aggregates, are imported in very small quantities and are not exported widely. On the other hand, most of the finishing and interior design materials are imported because locally manufactured products are viewed as inferior in quality. Many Russian consumers opt for foreign-made products. Therefore, there is stiff competition between foreign manufacturers and suppliers. However, over the past few years, the market share of some imported finishing materials, such as ceramic tile and dry construction mixtures, have significantly decreased because local manufacturers have improved manufacturing processes and quality. Today, Russian manufactures have a 72.2-percent share of the ceramic tile market and a 90-percent share of the dry construction mixture market.

Approximately 85 to 90 percent of all building products that are manufactured in Russia are used locally. The remaining share is exported to other countries. Products exported from Russia include bitumen roofing materials, ceramic tiles, and ceramic bathroom products. Almost 50 percent of Russia’s production of asbestos is exported.

Despite the economic slowdown, there are several segments within the building products industry that remain stable. The construction and re-construction of public roads and transport infrastructure is expected to continue, albeit at a reduced pace. Construction materials generally used for such projects include asphalt, asphalt concrete, crushed stones, and gravel. Therefore, the demand for those materials should remain at current levels. With the drop in consumer income, the demand for cheaper interior and building products such as linoleum, wall paper, paints and other lower segment products may grow.

Interior doors

In Russia, interior doors are manufactured by more than 500 companies, such as woodworking factories, industrial complexes, furniture factories, millwork factories, steel mills, as well as repair and construction companies. Locally produced doors took hold among consumers in 2004 when Russian manufacturers invested in modern equipment and technologies and started producing quality products that met international standards.

Power tools

Prior to the fall of 2008, the market for power tools grew at an average rate of 25 to 30 percent per year. In 2007, the market volume was estimated at about 15 million units (USD 1.2 billion), and in 2008 at 18 million units (USD 1.5 billion). In 2009, growth in this market slowed down considerably. Overall, this segment is characterized by a growing number of imported, products. 85 percent of all power tools are imported, and 80 percent of all imported products are manufactured in China.

Floor coverings

Prior to the economic slow-down, experts were forecasting steady growth in this market segment. In 2010, the market is expected to decrease considerably. The most popular product in this segment is linoleum. In 2008, it accounted for 61.4 percent of the market. The total market volume in 2008 was 272.8 million square meters, out of which 128.6 million square meters was produced locally, 161.5 million square meters was imported, and 17.3 million square meters was exported. The local Russian market is heavily dominated by a German company called Tarkett, which has a production facility in Samara.

Bath tubs

The Russian market for bath tubs consists of three segments: cast iron baths (roughly 40 percent of the total market in 2008), steel baths (50 percent), and acrylic baths (10 percent). Although, the total market share of acrylic bath tubs is only 10 percent, these products are becoming more popular among Russian consumers because of their flexible designs. Over the next 3 to 5 years, this segment is expected to become a market leader.

Stretch ceiling

Stretch ceilings are extremely popular among Russian consumers. There are approximately 200 installation companies in Russia and about 30 companies that manufacture stretch ceilings (Prime House, Avanti, Kazanskiy Zavod Iskustvennih Kozh). These numbers are important to consider when comparing with other markets.

Windows

The Russian market for windows is divided into three segments: plastic, wooden, and aluminum. As of September 2009, plastic windows accounted for 76 percent of the total market (45.7 million square meters), aluminum windows accounted for 13 percent (7.5 million square meters), and wooden windows accounted for 11 percent (6.3 million square meters).

Prospective buyers

The end-users of building products are generally construction companies or individuals. These customers purchase either in open markets or in various retail stores. Most building products in Russia are still sold in open markets (80 percent). The remaining 20 percent are sold through DIY chains or individual stores (often opened by distributors). It is important to mention that in Moscow there are a lot of open markets, while in St. Petersburg most of the products are sold through DIY chains or through smaller building products stores that were opened by individual companies. In order for U.S. companies to enter the Russian retail market, they must first identify a local distributor, as retail chains are more likely to purchase only from local companies.