Retailers Warm Up to Russia

"There's a sense in which these companies are issuing the debt to get free money right now, but as well all know, they can easily use the cash" for international expansion, says Arun Daniel, senior consumer analyst at ING Investment Management in New York. "In Russia, there is no one major player, so they will need to cobble together some smaller players."

While Wal-Mart's main focus is on Japan and China, Russia is part of its long-term international strategy, he says.

As a result of the ongoing interest in the local market, shares in the few of Russia's publicly traded retail chains have soared on speculation that some of them may soon become acquisition targets by foreign firms. For example, shares in X5, a Russian retail grocer listed on the London Stock Exchange, have doubled since June.

With petrodollars fueling a rising middle class, the Russian retail market grew by 22% in 2006 to 8.6 trillion rubbles, or $316 billion. This growth is expected to increase to 21.14 trillion rubbles ($777 billion) by 2010.

The potential for big brands is good because the country's retail market is still comparatively undeveloped, with most shopping still done in open-air markets. Such buying habits are seen as an opportunity for brands to penetrate the market as an increasingly fickle middle-class population demands quality and convenience.

"Fortunately for retail chains, the emerging middle-class market is looking for more comfort, quality and safety when shopping," says a research note issued by PMR Consulting in Russia. "Consequently, companies operating supermarkets, hypermarkets and discount stores are developing faster than the whole grocery market and increasing their market share. In 2007, we predict organized retail chain share growth to grow by 3.6% to 15.6%."

Longer term, some observes believe Russia could be fertile ground for Home Depot (HD Quote) and/or Lowe's (LOW Quote). In Russia, unbranded open-market retailers still make up three-quarters of "do it yourself" retailers, while the other quarter of the market is divided between six branded stores. Home Depot already has stores in Mexico and China; Lowe's operates in Mexico.