Nicholas Watson in Prague -

The growing power of the Russian consumer around the world has been one of the biggest stories of the past few years, but a new report predicting that Russia's consumer market will be the largest in Europe as early as next year shows just how far and how fast this development is moving.

By 2008, Russian GDP per capita will be approaching $15,000 in terms of purchasing power parity (PPP) and $10,000 in nominal terms, making the country more like those convergence states in Central and Eastern Europe than the low-income markets of its so-called BRIC (Brazil, Russia, India and China) brethren.

In a report by Troika Dialog, the Russian investment bank calculates that some 60% of the Russian population will have a monthly PPP disposable income per capita after household costs of over $350 in 2008, giving them access to a wide range of consumer goods. This implies that by 2008 the total number of Russian consumers will have reached 85m, more than Germany's population, thus making it the largest consumer market in Europe.

"Already, Russia is Europe's largest consumer market in many areas," the report says. "In 2004, Russia became the largest market in Europe for mobile phone users. In 2005, it became the largest market in volume terms for washing machines, and next year we expect it to become the largest market in Europe in volume terms for fruit juice and beer."

And Troika believes there's more growth to come as manufacturers build their distribution chains across the Russian regions, enabling the growth already witnessed to be replicated across a range of other sectors. In many areas of consumer demand, Troika is anticipating annual growth of 20-30% for the next four years - in stark contrast to European consumer markets, which are used to stagnant volumes and single-digit sales growth rates.

"Consequently, we expect the Russian car market to become the second largest in Europe in 2008, and the Russian advertising market in dollar terms to become the third largest in Europe by 2010," the bank says.

The predicted upshot of this will be a pick-up in the amount of mergers and acquisitions of domestic companies as multinationals expand into the Russian market, which has so far received less than a fifth of the level of foreign direct investment per capita enjoyed by the rest of the CEE region.

The push that this M&A will give to Russian consumer firms' valuations - which are currently trading at a very reasonable forecasted 2008 price/earnings ratio of 15.0 - combined with the predicted high growth in business, will present investors with a lot of very attractive opportunities. "Most stocks across the consumer and related sectors are attractive, both in their own right as high-growth stories and as potential M&A candidates," Troika says.

Troika has selected a group of 20 stocks that it believes offers good exposure to the consumer story, and splits these into three groups in valuation terms: expensive (P/E multiples over 20), average (between 15-20), and cheap (under 15).

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