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. Last Updated: 07/27/2016

The Key to the Wholesale Trade

The empty shelves and low quality of Russian shops convince many Western businesses that distributing imported goods to Russian consumers is all but impossible.

But a British joint venture, Fonon International, 60 percent owned by British quartz maker Ruditi International, has found the key to Russia's nascent wholesale trade and built a 15 billion ruble distribution network.

"It's just not true that there were no distribution networks here", says Dmitry Nikitin, Fonon's president. "It is not a physical shortage of trucks and shops. Russia has always distributed goods to the most remote areas".

Fonon's sales have grown from 26 million rubles in 1990, to 1. 14 billion in 1991 to 15 billion rubles this year, a massive jump even in hard currency terms.

Ruditi, the parent company, has been reinvesting profits but will start repatriating profits at the end of the year.

Nikitin says the first lesson is that, unlike in the West where wholesalers distribute to stores, much of his business involves selling to Russian factories and businesses who distribute directly to their employees. The goods never reach the shops.

"We have a huge list of wholesalers, factories, state firms and they are our customer base", he said.

Ruditi Moscow runs a huge retail and wholesale showroom on Novy Arbat with 15, 000 product lines, including office equipment, home appliances consumer goods and food which are advertised regularly in Russian papers. Six months ago, it issued Russia's first store charge card.

Wholesale business has grown so big that in two weeks Roditi will open a new showroom on the outer ring at Mozhaiskoye Shosse.

The retail and part of the wholesale trade is for hard currency, but Nikitin says the key problem for Russian customers is helping Russian wholesale buyers with little financial experience find ways to turn rubles into cash.

The first and most obvious way is buying hard currency for rubles through the Moscow Interbank Currency Exchange, but Fonon is reducing its participation as the official rate drops.

"Due to the low exchange rate, a kilo of imported sugar is worth a month's salary in rubles so that's clearly not the way to distribute sugar", he says.

There are only a small selection of goods -- shoes, tea and coffee -- that can be marketed through Russia simply by converting rubles into dollars. Fonon does not sell cigarettes for ethical reasons.

Fonon also does not use barter since, Nikitin says, it would attract the 30-percent barter surcharge on export duties.

Instead, it uses its rubles to buy Russian raw materials for export. It also uses rubles to develop a local electronics manufacturing business.

Ruditi started in Russia in 1990, buying Spanish factory equipment to assemble its own brand of calculators, faxes and electrical consumer goods. It will soon open a second factory on Leninsky Prospect using Irish factory equipment.

It also bought a cultured quartz crystal subsidiary, Karat Ltd. , in Kuznetsk and a factory to build quartz crystal resonators, oscillators and filters used in television and other electronic equipment.

Nikitin says the component subsidiary Metrofil has a virtual monopoly on remote control TV sets in Russia.

Manufactured electrical components are now generating a big slice of the company's foreign exchange earnings.

Each of Fonon's business is independently profitable, with the wholesale component the best earner followed by manufacturing and then retailing.

Nikitin scoffs at businessmen who hesitate to get into distribution here.

He says the tax laws are no worse than businesses would expect in the West. "It's difficult to have the courage to invest, but once you get here, it is not that hard to set things up".