Jan. 18 (Bloomberg) -- Wal-Mart Stores Inc., the world's largest retailer, may expand into Russia within the next two years to capitalize on a swelling economy and a dearth of competitors, UBS AG analysts said.

Wal-Mart may follow its past practice of using a joint venture or acquisition to enter the market, UBS analysts including Neil Currie and Svetlana Sukhanova said yesterday in a research report. The bank has a ``buy'' recommendation on the Bentonville, Arkansas-based company's stock.

The economy in Russia, the world's biggest crude-oil and natural-gas exporter, is expanding for a 10th year in a row. Supermarkets and superstores generate less than a third of retail sales, UBS said. The bank cautioned that a takeover of a local company such as X5 Retail Group NV or OAO Dixy Group would be expensive because surging sales have made their shares pricey.

``We do not see a need for an immediate rush into Russia in the next 12 months, as growth in that market has caused valuations to be at premiums,'' UBS said. ``If an opportunity presents itself, the market attractions are strong enough for Wal-Mart to act sooner if necessary.''

Russia was singled out as a potential market in October by H. Lee Scott, Wal-Mart's chief executive officer, in spite of a reputation for corruption. The country is ``a growing consumer nation,'' he said.

Growth Forecast

Open markets and independent grocers generate most Russian retail sales, according to UBS. The country's $145 billion food- retailing industry accounts for almost half of total spending and will expand on average by 17 percent annually through 2010 as rising incomes boost demand for better food, the bank said.

Wal-Mart may team with a local partner to open Russian stores, Juan Figuereo, vice president for international mergers and acquisitions, said last February. The company was among potential partners with which X5, Russia's largest supermarket company, would consider allying in a joint venture if it were to seek to expand in Russia, CEO Lev Khasis said in March.

Joining with X5 ``would be a positive catalyst and provide new strategic and supply opportunities,'' UBS said. The Russian grocer has about 750 of its own outlets and around 625 more run under franchise and also is developing a superstore chain.

X5 stock trades at 46 times estimated 2007 earnings, data compiled by Bloomberg shows, and Dixy changes hands at 54.3 times, compared with Wal-Mart's multiple of 15.5 times profit estimates. X5 shares have more than doubled since they were first sold to investors in May 2005, boosting the company's market value to $7.14 billion.

Accelerating Expansion

Russia's economy probably grew 7.6 percent in 2007, the Economy Ministry said last month, beating a prior forecast and speeding up from the year-earlier 6.7 percent pace. Auto sales in the country may rise 13 percent this year and overtake deliveries in the U.K., an industry group said this week.

Moscow and St. Petersburg are drawing more expansion interest from retailers than any other cities in the world, according to the 2007 International Retailers' Survey. Paris- based Carrefour SA, Europe's biggest company in the industry, plans to open its first Russian stores this year.

The country's retail market offers ``strong potential for consolidation'' because the five biggest chains control just 7.4 percent of sales, compared with 35 percent in the U.S. and as much as 80 percent in Europe, UBS said. Superstores generated just 7 percent of total food retail sales in Russia in 2007 and will more than double in number over the next two years, it said.

A property market lacking in transparency and distribution hurdles would be Wal-Mart's biggest challenges in Russia, according to UBS. ``The cost of real estate is high in Russia, bureaucratic procedures can be numerous, and significant complexity exists in logistics,'' the analysts wrote.

To contact the reporter on this story: Maria Ermakova in Moscow at mermakova@bloomberg.net.

Last Updated: January 18, 2008 06:55 EST