Russia – heading for recession, mobile market will contract

We have been warning for some months that Russia is heading for tough times. The international response to Russia’s intransigent position in Ukraine has been exacerbated by falling oil prices; energy being one of Russia’s key exports. The Ruble has fallen sharply over the last few months – dropping by 50% against the US dollar. In response Russia’s central bank has increased interest rates to shore-up the ailing currency. Time will tell if enough has been done to halt the slide, but much damage has already been done. Imports to Russia will become substantially more expensive in Ruble terms.


Dollar to Ruble exchange rate since December 2013

The Russian mobile device market has held up surprisingly well in 2014. However device manufacturers, who have been swallowing price rises to a substantial degree so far, cannot hold out much longer. OEM’s supply chains are dollar denominated. We fully expect handset OEMs will start passing on the higher Ruble prices to their channels and likely to the end consumer. A device with an ex-factory price of $100 this time last year would have translated to 3300 Rubles. Today (16th December 2014), the same device costs over 7100 Rubles. Given how tight margins are, no OEM can swallow that rate of change.

Most consumers will tend, on average, to pay approximately the same amount when they change their mobile phone. Given the rapid advance in technology this means that someone upgrading after two years will be able to buy a substantially better product than the one they have been using. Displays, processors, memory size, camera sensors and other parts of the phones improve at greater or lesser speeds, but all do improve.

However for the Russian consumer in 2015, this will no longer hold true. Paying the same Ruble value for a device will not bring the expected upgrade in performance. The likely result is that consumers will put off upgrading – hoping that prices fall in future. In other words the replacement cycle will get longer. Some people will be forced to buy a new handset because their previous one is lost or broken or stolen. However we expect these ‘distressed’ purchases will tend to be for a lower range device or even a secondhand device.

In addition to consumer behavior, distribution channels will want to hold less stock. As the currency exhibits volatility, channels will not want to invest in product that may suddenly seem expensive should the exchange rate improve.

OEMs should model likely disruption scenarios to the market and keep a constant watch on how the currency value and other economic indicators change — especially inflation. Our current estimates suggest the Russian mobile device market will fall 15-20% in 2015 – from around 51 million units in 2014.

Perversely super-premium products — such as the most expensive Apple iPhone models, Apple Watch, Vertu products and other high-priced and luxury products — may be less affected as Russia is home to a strata of extremely wealthy consumers for whom substantial price rises will merely create more potential Giffen goods. However the bulk of the very substantial Russian population will be adversely impacted. And they will be forced to moderate their spending on discretionary items such as mobile devices and other consumer electronics. Any player with substantial exposure to the Russian market must make contingency plans now.