Russian Security Market Expected to Grow Significantly

Author: Olga Fedoseeva, Published on Nov 27, 2008

The consensus expert position is that the Russian security market shall continue to grow significantly despite the turbulent global economy. This report examines the Russian security market, explaining the key participants and factors in the industry. Both pessimistic and optimistic forecasts are presented with an explanation of why most experts are optimistic.

Overview of Russian Security Market

The Russian Security market is one the most dynamic markets in the world. The total values of purchases of security equipment and services in 2008 will exceed $17bn.

In 2006-2008, the Russian market for electronic physical security equipment (EPS) grew 20% per year. Over 80% of technical security equipment sales take place in 4 out of 85 of the Russian Federation areas: Moscow and Moscow region, Saint Petersburg and Leningrad region.

The number of solid customers of the EPS market in Russia is relatively small. Approximately 500 state and corporate customers comprise 80% of EPS purchases in Russia. Of that, the share of the three largest Russian monopolies-CJSC “Gasprom”, RAO Unified Energy Systems of Russia and CJSC “RZHD”- constitute about 18% of the total supply share. The total number of prominent players in the market (producers, re-sellers and fitters) dealing with technical security systems does not exceed 1,000. A maximum of 20 companies control at least 50%, and in some cases, up to 90% of the total volume in each segment of the Russian EPS market. Demand for technical security equipment in the private sector falls below 5%.

Three branches of Russian customers provided in 2006-2007 - 50% of EPS demand in Russia:

  • Government (23%)
  • SMB (Small & Medium Size Business) (15%)
  • Retail trade (12%)

In 2007 there was made a forecast of even growth of consumption of electronic physical security equipment in main regions of Russian Economics in 2008. However the crisis on the world financial markets, decrease of affordability of the foreign investments for the Russian enterprises, slowdown of growth rates in construction sector led to decrease of forecast growth rates of electronic physical security equipment in a range of branches.

In SMB segment, the sharpest slowdown of growth rate is observed (practically zero increase). Purchase growth rates in segments of Retail trade and Finances has tangibly decreased.

Insignificantly, in contrast with the forecasts, purchase growth rate is decreasing in segments of Industry and Power Engineering. In 2008, contrary to all the experts' forecasts, one can observe a sharp growth of the government purchases of electronic physical security equipment. In 2008 they will increase by $435 million (as compared with the earlier forecast value of $355 million). That is why a government share of purchases of physical security equipment in Russia will increase from 23% to 28%.

The Russian electronic physical security equipment market in the segment of the largest and large corporate and state consumption is characterized by a high concentration both on the part of the customer and on the part of the consumer.

In each segment of the Russian electronic physical security equipment market (complex projects, projects in the area of video surveillance, PACS, FAS, IDS) there has been a division of installation companies (integrators) into three to four groups, namely; very large, large, medium, and small. Intergroup competition is next to impossible. Companies of one group compete with each other. A tendency for alliances is observed in the group of the biggest players.

Installation organizations dealing with medium and small projects work in a very competitive atmosphere and fight for small and very small orders. The same companies often act as subcontractors of big integrators in large-scale projects working on the verge of profitability.

In the course of update researching the security market experts has formulated several scenarios of security market growth in 2009 - 2011. All the three scenarios rely on the expert’s forecasts in the area of two fundamental causes, having an influence on the Russian market growth and its additional segments:

  • Oil price
  • Economic politics of Russian Government
  • The majority of experts has inclined towards the optimistic scenario.

Scenario 1. Pessimistic

Oil price is going down below $60 for barrel. Government is going on its previous economic and budget politics. Government’s expenditures (expenses) are reducing a bit. A quantity of spare money is cutting down. Proportions of security expenses by the branches are saving approximately at the level of 2008. Russian security market rate will slow down up to 10% in 2011. Not more than 10% of participants of the market take this view.

The following facts are cited contrary to the given scenario:
Vice-Premier of the Government of Russian Federation, the Minister of Finance of Russia – A.L. Kudrin declared that the main operation factors of the budget for 3 years (2009-2011) would execute the budget. In case of going down of oil prices below $40 for barrel for financing budget deficit, the government reserve will be used.
  1. The biggest corporate customers (from the first top thirty biggest Russian companies) do not expect shortening of budgets for purchases of electronic physical security equipment in the nearest three years in connection of realization of scale projects in the area of oil and gas industry, transport, energy sectors, telecommunications.
  2. Income growth rate of the population will be supported by the Government at the level of 2006-2008.

Scenario 2. Optimistic. Evolution

Oil price is above $60 for barrel. The Government continues its previous economic and budget politics. The tendency for strengthening of Government’s participation in economics, as well as for overcoming of the negative consequences of the world financial crisis, is increasing.

State consumption goes on growing. Financing of big projects (as well as pipeline, transport, social, sport, politic) continues to grow in volume.

Growth rates save at the level of 20%. High end equipment share increases sharply in the total volume of purchases. Perimeter systems share exceeds the volume of equipment in the area of security and fire alarm. State consumption share increases sharply in the Russian market of electronic physical security equipment -up to 33% by 2003. In connection with the growth of the population incomes, private consumption share of electronic physical security equipment increases up to 10% by 2011. SMB, retail, finance shares reduce.

Over 70% of participants of the market take this view.

In case of optimistic evolution scenario, state purchase’s growth in total volume of purchases of electronic physical security equipment will be stipulated by the following factors:

  1. The beginning of the scale investments to building and equipping of Olympic objects in Sochi.
  2. Speeded up completion of building and equipping of the objects on Russian island in Primorsky region (for the APEC Forum in 2012).
  3. Sharp increasing of state investments and equipping of cities with the video surveillance for the street traffic (as well as within the bounds of anticorruption programme of the President – D.A. Medvedev).
  4. Increasing of state consumption to re-equipment of the enterprises of defence and industry complex (as well as modernization of security systems).
In case of optimistic evolution scenario, purchase share of electronic physical security equipment in oil and gas sector also can increase from current 10% up to 13% and higher.

Opinion piece submitted by Alexander Vlasov, Business Development Executive at GROTECK Business Media, Russia

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