Russian retail growth is surprisingly stable.

The Russian economy had a difficult first half 2005 in spite of the fact that windfall profits from rising oil prices will stimulate overall economic growth for the year. The Russian Economy Ministry said that growth from January to June 2005 was 5.6 percent, down significantly from 7.6 percent from the same period in 2004.

Retail prices rose 8.1 percent from January 2005 through June 2005 compared with a 6.1 percent increase during the same period in 2004, according to a Reuters report originating from Moscow and carried by the Cable News Network (CNN) in late August 2005.

Some of the 2005 disappointments are evident in the chart above where a dip in the growth of Russian retail sales and a near crash in the growth of disposable real income is evident. Note, however, that the decline in retail sales growth was from 14.2 percent in December of 2004 to 9.2 percent (compared to the same months in the previous year) in January of 2005. And note, too, that as of April 2005 retail sales grew 12.2 percent when measured against April 2004.

While in no sense is Russian retail comparable to the retail sectors of countries in Western Europe, performance is, nonetheless, remarkably aggressive.

This is not the cliched picture the world holds of Russia's retail sector. Other puzzles emerge as well from the page 1 chart.

During 2004--generally considered to be a good year for the Russian economy ---two prominent dips in real disposable income are visible. And from July 2004 to March 2005, the retail growth line and the disposable income line appear relatively far apart suggesting retail strength against real income decline.

Normally one would expect to see retail growth more seriously affected by a decline in income.

The answer to this seeming paradox was provided by three recent reports on the Russian consumer market. Two of the reports are by the respected Interactive Research Group (IRG) (Moscow) and one other, using some of the results from the IRG reports was authored by Russia's biggest direct marketing company, The PPE Group (Moscow).

In its discussion of the Russian consumer market, IRG offered two ideas that would explain the stability of Russian retail. The first is that Russian consumers are not burdened with nearly the same basic expenses as are consumers in developed countries.

Rents are lower in Russia. Most of the members of Russia's growing middle class own their own apartments. Electricity costs are much lower, as are taxes.

Thus much more of a household's income can go into discretionary spending.

In its January 2005 report, IRG offered also some eye opening facts about the Russian market.

Mobile phones: Users grew from 3.4-million in 2000 to 74-million in 2004 with market penetration going from 2.3 percent to 51 percent over the period.

Internet: Market penetration grew from 6 percent in the autumn of 2002 to 12 percent, autumn 2004.

Cars: New foreign car sales increased 80 percent in 2004. Domestic car manufacturers grew 12 percent.

IRG says the Russian government underestimates the contribution of consumer markets to GDP. IRG's rough estimate for 2004 is 50 percent.

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