Russia has seen nine straight years of growth, averaging nearly 7 percent annually since the financial crisis of 1998, noted the CIA World Factbook. Although high oil prices and a relatively cheap ruble initially drove this growth, consumer demand and investment have played a significant role. According to the World Bank, Russian economic performance remains robust.
Over the last five years, fixed capital investments have averaged real gains greater than 10 percent per year, and personal incomes have achieved real gains more than 12 percent per year. During this time, poverty has declined steadily and the middle class has continued to expand.
Russia has also improved its international financial position since the 1998 financial crisis. The federal budget has run surpluses since 2001 and the surplus is now 9 percent of GDP. Over the past several years, Russia has used its stabilization fund based on oil taxes to prepay all Soviet-era sovereign debt to Paris Club creditors and the International Monetary Fund.
Oil export earnings have allowed Russia to increase its foreign reserves from US$12 billion in 1999 to some $315 billion at the end of 2006 the third largest in the world. According to the World Bank, this reached $450 billion at the end of 2007.
During President Vladimir Putinˇs first administration, a number of important reforms were implemented in the areas of tax, banking, labor and land codes. These achievements have raised business and investor confidence in Russia's economic prospects, with foreign direct investment rising from $14.6 billion in 2005 to an estimated $30 billion in 2006. Russia also signed a bilateral market access agreement with the U.S. as a prelude to possible World Trade Organization accession, and its companies are involved in global merger and acquisition activity in the oil and gas, metals and telecom sectors.
By the end of 2006, the volume of the safety and security equipment market in Russia reached $1.2 billion, pointed out Stefan Mizha, Commercial Officer at the U.S. Commercial Service. ¨Within the next three years, demand for safety and security services and equipment is expected to exceed $6 billion.〃
According to a recent report by the Russian Security Industry Association (RASI), the total market size for Russiaˇs safety and security equipment and services market reached $5 billion in 2005, and equipment alone accounted for $1 billion. Of that, the video surveillance segment was $280 million, with 25 percent annual growth; the alarm segment was approximately $330 million, with 20 percent annual growth; and access control systems accounted for $180 million in sales, with annual growth of 25 percent and the potential to reach growth of 40 percent.
Alexey Umnov, Technical Director of AAM Systems, observed that growth was about 30 percent last year; he thinks it could be similar or even higher this year. For Vladimir Osipov, General Manager of Satro-Paladin, the market is worth $3 billion, with video surveillance accounting for 34 percent of this, access control 28 percent and burglar alarms 38 percent. He further estimated that imports constitute roughly 70 percent, locally produced products 30 percent. ¨That said, the share of local production is increasing.〃
In terms of market structure, RASI noted that surveillance accounted for 30 percent of the total electronic security market, intrusion alarms and guarding systems 24 percent, access control and management 18 percent and other 9 percent. The Central Federal Region (Moscow and area) constitutes 40 percent of the market, the Urals Federal Region 23 percent, North-Western Federal Region 16.1 percent and the Siberian Federal Region 11.7 percent. Growth has averaged 20 to 25 percent.
¨Moscow, St. Petersburg and Yekaterinberg are all important markets , but there are many other good opportunities in cities throughout the country,〃 said Anton Stavitsky, President of SimonsVoss Technologies Russia. ¨Moscow, however, is especially important as this is where the bulk of business and finance is done. Here, you will find the richest and biggest banks and corporations.〃
The guard services market numbered 26,000 enterprises as of Jan. 1, 2007, according to the Russian Ministry of the Interior. Of this, physical and technical guarding accounted for 70 percent of the market, detective services 10 percent, information and analytical services 5 percent and personal security 15 percent.
Private security enterprises in Moscow earned revenue of $1.4 billion in 2006, and those in the rest of Russia generated income of $12 billion. Meanwhile, Ministry of Interior noncorporate guards brought in $1.1 billion with corporate security seeing $200 million, and detective and information analytical services $100 million. For guard services, Moscow accounts for 18.2 percent of the market, the Moscow region 4.6 percent, and St. Petersburg and the Leningradskaya Region 5.7 percent.
Russiaˇs market for safety and security systems, RASI said, is characterized by a high potential for development and an increasing need for imported components and systems. Depending on the segment, the share of imported products is estimated at between 50 and 90 percent. Experts estimate that up to 60 percent of access control, 50 percent of intruder and fire alarm systems, and more than 80 percent of surveillance systems are imported.
Currently, the most popular types of equipment are low-cost imported solutions from China, Taiwan and Korea. Premium-class systems are imported from the U.S., Europe and Japan. A recent trend is a growing interest in better quality, more reliable equipment and systems.
Russia was a very price-sensitive market four years ago, said Aleksey Vitalisov, Business Development Manager for Armo Systems. This was made worse by newcomers entering the market who were trying to get ahead by selling the cheapest equipment.
¨Eventually, customers found out that it did not work properly and they looked to products that did perform,〃 he said. ¨We have a saying in Russian: ˉThey burned their wings so they are no longer willing to fly over the forest.ˇ In other words, they learned their lesson.〃
According to Vitalisov, they have since moved on to higher quality products. The strong Russian economy also means that they have more money to spend.
Other phenomena, RASI said, include liberalization of trade, deterioration in competitive abilities of some Russian service providers, increase in strictness of technical regulations, a more transparent market, streamlined administration (less bureaucracy), rising wages and introduction of modern management technologies.
Key Verticals and Projects
Principle customers of the Russian security industry include: commercial realty 28.3 percent, banking 23.2 percent, retail 19.2 percent, oil and gas 14.5 percent, other 8.8 percent and residential 5.9 percent. According to Osipov, for the commercial sector, quality and reliability are the key issues; for residential, there is a tradeoff between price and quality; for government, decision-making is totally unpredictable and varies from case to case.