Food Industry 1991-2000
The Russian food industry holds the record for direct investment by both domestic and Western companies. According to various estimates, about $6 billion has been invested in the production of food products, drinks, and tobacco products in ten years of Russian capitalism. In addition, a number of operators on the domestic consumer market have invested record amounts in the Russian economy. The two giant soft-drink producers, Coca-Cola and Pepsi-Cola, have together spent more than $1.3 billion in Russia. According to some data, the food industry accounts for up to 60% of all direct foreign investments made in Russia after the crisis. This is not surprising, since market capacity, and hence food production, is growing steadily. Today, the domestic food industry is growing by 5-7% annually; in some sectors, this figure is 15-20%. In addition, the investment cycle of an average food-industry project is one and a half times shorter than for similar-sized investments in any other industry. Finally, food production (except for vodka) is not as politicized as the gas or oil industries. The result is the successful operation of tens of thousands of Russian and Western companies in their combined efforts to feed Russia.
HISTORY: 1991-2000
In nearly ten years of its existence, the Russian food market has changed almost beyond recognition. The heroes of the first half of the 1990s gave place to new companies and people in the middle of the -90s. Surprisingly enough, this process has been peaceful. Unlike the oil and aluminum industries, shootings, bailiffs, and battles with labor collectives have been the exception rather than the rule.
1991
On the initiative of former KGB officer Boris Smirnov, the Center for Ecological Problems of the USSR Academy of Creative Endeavors registered a small state enterprise P.A. Smirnov and Descendants in Moscow (P.A. Smirnov i potomki v Moskve). The company was established to produce Smirnov vodka according to pre-Revolutionary recipes. Smirnov stated that his vodka would be produced parallel to the American brand Smirnoff and that P.A. Smirnov would not try to sue the American company Heublein, Smirnoff's owner.
The foreign trade association Vneshposyltorg attempted to break the monopoly of another foreign trade association, Soyuzplodoimport (SPI), on exports of Stolichnaya vodka. Vneshposyltorg tried to sell 100 000 liters of Stolichnaya in Greece, but SPI's Greek partner challenged the operation in court.
In October and November food disappeared from stores in large cities and state food prices increased by 300-400%. The attempt of local governments to introduce the practice of so-called negotiated prices and subsidize staple foods ended in failure. The subsidized products were bought up instantly due to their low price, and overall food prices in stores gradually rose to the levels at farmers' markets. This situation resulted in the threat of countrywide food shortages.
Food aid began to arrive in Russia at the end of the year from the EU countries with a first installment of $774 million and from the US ($1 billion). The country was introduced to "Bush legs" (chicken thighs, named after US president George Bush, Sr.) and blocks of boneless meat.
1992
P.A. Smirnov began production of Table Wine #40 vodka, and at the same time Boris Smirnov announced that he would fight the Grand Metropolitan corporation, which owned Heublein. In his opinion, the Americans were producing a bad imitationof Smirnov. The lawsuits between Heublein, which is now a part of the UDV conglomerate, and the small Russian company (in the mid-1990s, it was reorganized into the Trading House of the Descendants of P.A. Smirnov, Purveyor of Vodka to the Court of His Imperial Majesty) are still being fought in courts in Moscow, Krasnoyarsk Territory, several European countries, and the US, and no end is in sight.
On January 16, the management of Coca-Cola announced the creation of the joint-stock company Coca-Cola Refreshments Russia (CCRM) to build a soft-drink plant in Russia. By that time, Coca-Cola's main competitor, PepsiCo, was already active on the Russian market. At the beginning of the 1970s, PepsiCo had signed a contract with the USSR to sell Stolichnaya vodka in the US. In exchange, PepsiCo supplied Russia with Pepsi concentrate, which was bottled in 0.33-liter bottles at domestic plants. Moreover, the production of Pepsi in two-liter plastic bottles began in November.
In December St. Petersburg company RJR-Petro, founded by the transnational company R.J. Reynolds at Uritsky tobacco factory, started the first two production lines. At first, the company produced only domestic brands, but after several years, it began producing Camel and Winston cigarettes.
The Dukat tobacco factory in Moscow and the American company Brook Overseas, an affiliate of the Liggett Group, jointly established the Liggett-Dukat company. The plan was to move the factory's facilities from the center of Moscow to the outskirts (either Tushino or Chertanovo) by 1994 using foreign capital. The company moved to Orekhovo-Borisovo District only in 1999.
The Pernod Ricard-Altai joint vodka-production venture was set up at the Zmeinogorsk Distillery (Zmeinogorsky likerovodochny zavod). The project was initiated by the major European alcohol manufacturer Pernod-Ricard, which also bought the Yerevan Brandy Factory (YeKZ) seven years later.
1993
The Scandinavian group Baltic Beverages Holding (BBH) bought 43.5% of the shares of the Baltika brewery in St. Petersburg. Two years later, BBH's share had increased to 75%. The company installed new equipment at the plant, and Baltika became the first domestic brewer to begin commercial production of high-quality beer with an extended shelf life. As a result, Baltika quickly became the leader on the Russian beer market.
McDonald's, in addition to its famous restaurant in Pushkin Square, opened two more restaurants on Gazetny pereulok and Stary Arbat. The company announced that by 1995 it would open another five restaurants in Russia, moreover it would turn down on the franchising schemes it used in the rest of the world and run the restaurants in Russia by itself.
The Nevo-Tabak factory of St. Petersburg and Rothmans International Tobacco signed an agreement to set up the Rothmans-Nevo joint venture. Construction of the Rothmans-Nevo factory in St. Petersburg with a capacity of 12 billion cigarettes per year began almost simultaneously.
The Moscow-based Yava tobacco factory began preparations for becoming a corporation. Even at the early stages of preparation, there were rumors that British American Tobacco (BAT) was the most likely buyer of shares in Yava, Russia's best known tobacco company. The rumors were confirmed a year later when BAT took control of the company.
At the same time, Philip Morris bought a share package in AO Krasnodartabakprom of Krasnodar from the local property fund. R.J. Reynolds had also been a contender for the shares, but the company's management chose Philip Morris, whose representatives offered a more favorable development plan.
Interestingly enough, the high level of investment activity in the tobacco industry led to a ban on tobacco advertisings on television. Advertising agencies were especially upset by the ban, claiming that investments in the tobacco industry would drop. However, later years proved their predictions wrong.
The Swiss company Nestle opened an office in Moscow, but its activities in Russia were limited to importing its products from abroad.
1994
Excise duties on alcohol rose on January 1, which increased the price of officially produced vodka by 50-70%. Most companies were either forced to make drastic production cuts or stop production altogether. The Kristall and Liviz distilleries actually did shut down for a while. The difficult situation and repeated appeals to the government by distillery directors had an unprecedented effect: several months later excise duties dropped back to their previous levels.
The Mars company began construction of two factories in the town of Stupino near Moscow to produce Snickers and Mars chocolate bars, other food products such as Uncle Ben's sauces, and Whiskas pet food. Mars invested more than $200 million in the project and in return received concessions on import duties on Mars products brought into Russia, a move that angered other confectionery companies on the market.
Coca-Cola Refreshments Moscow opened a factory in Solntsevo near Moscow. The company invested nearly $100 million in its Russian infrastructure.
BAT bought 75% of the shares in the Saratov Tobacco Factory (Saratovskaya tabachnaya fabrika), which was soon renamed BAT-STF. The factory began producing Pall Mall cigarettes instead of its traditional Prima brand.
1995
Sugar prices increased almost 25% in January when the value-added tax (VAT) on the raw sugar used to manufacture white sugar increased from 10% to 20%.
At the beginning of the year, it was learned that Nestle had taken control of the Rossiya factory in Samara, one of the country's largest confectionery manufacturers. Privatization of the factory had started three years earlier, with 51% of the shares passing to the labor collective and the remaining 49% going to the local property fund. Mars and Philip Morris were also interested in the factory, but Rossiya's workers believed that the company's management, headed by Aleksei Khomyakov, had been won over by Nestle's presentations.
Baskin-Robbins opened an ice cream factory in Moscow.
Heinz began building a factory to produce baby food in Stavropol at an estimated cost of $25 million. The company planned to buy 99% of all necessary products and materials from Russian manufacturers.
The Rust company founded by Rustam Tariko in 1992 had a virtual monopoly on supplies of well-known elite brands of alcohol in Russia. The company first obtained exclusive rights to sell Martini and then signed a distribution agreement in 1995 with United Distillers, the producer of Johnny Walker whisky, and began supplying Bacardi rum.
A consortium of companies headed by Inkombank acquired a controlling block of shares in the Babaev Confectionery Factory (Konditerskaya fabrika im.Babaeva), the second-largest in Moscow, for $13 million. The factory's administration made an unsuccessful attempt to fight back with the help of the Moscow city government.
Russia and Cuba signed an agreement under which Russia would deliver 3 million tonnes of oil to Cuba in exchange for 1 million tonnes of Cuban raw sugar. Two companies, Alfa-Eco and MENATEP-Impeks, ran the operations. Similar operations continued in 1996 and 1997.
1996
Coca-Cola began building a factory in Krasnoyarsk. The company had been trying for the past year to reach an agreement with VINAP of Novosibirsk, one of Siberia's largest soft-drink producers; but VINAP, which had worked with PepsiCo for a long time, did not want to change partners and refused to produce Coca-Cola products.
The Maisky Tea Company (Maisky Chai) set up the Russian Tea Association (ChAR), which caused an uproar on the market. Two other large tea companies, Nikitin Trading House (TD Nikitin) and Dilmah, accused Maisky Chai of trying to lobby for its own interests through ChAR. ChAR later lost much of its influence as Maisky Chai's market position weakened.
The veterinary department of the Ministry of Agricultural Produce imposed a ban on chicken imports from the US. Officially, the ban was imposed after inspections of several American poultry farms by Russian veterinarians, who discovered that "Bush legs" were being stored at temperatures that violated regulations. The Gore-Chernomyrdin commission discussed resuming imports. According to an unofficial version, the ban was initiated by one of the country's largest chicken importers, who had bought huge supplies of chicken legs before the veterinary department issued its order.
Inkombank, which owned the controlling block of shares in the Babaev factory, announced it was forming the Babaev Confectionery Holding (Babaevsky konditersky kholding) from the factory. Five other companies later joined the holding later.
Nestle set up a joint venture with the Zhukovsky Refrigeration Plant (Zhukovsky khladokombinat) and began producing ice cream in Russia.
Russian pasta manufacturers held a meeting in Moscow, demanding that the government limit pasta imports to Russia by means of customs duties and quotas, but the government ignored them. Two years later, there was a financial crisis in Russia and pasta imports disappeared from Russian markets without any government intervention.
President Yeltsin signed the decree "On Collecting Excise Duties on Excisable Goods Imported from Ukraine to the Customs Territory of the Russian Federation," whose main objective was to put up barriers to imports of Ukrainian-made Russkaya and other vodkas. The Ukrainian government accused Russia of violating free trade agreements between the two countries.
There were further changes in the alcohol market when the government introduced so-called minimum prices for domestic and imported vodka in an attempt to force bootleggers to sell their products at the same price as official distilleries. The assumption was that consumers would buy officially produced vodka instead of bootleg vodka at the same price because of the higher quality of the legal product. However, bootleg vodka did not disappear from store shelves. Official producers raised their prices, and although the cost of bootleg vodka increased, it was still cheaper.
1997
Excise stamps for domestic tobacco products were introduced at the beginning of the year. Prior to that, excise stamps were required only on imported cigarettes. There was a great deal of confusion when the stamps were introduced, because Russian cigarettes were being sold both with and without excise stamps simultaneously.
For the first time in the history of the Russian alcohol market, prices of officially produced vodka decreased, for the simple reason that the government introduced excise duty per unit volume of alcohol, the system used in the rest of the world. Excise duties had previously been based on the cost price of the product.
Import duties on packaged tea doubled, and everyone blamed TD Nikitin, because it owned three large tea-packaging plants and was the only major tea-market player to import bulk tea. Nikitin's competitors demanded a return of duties to their previous level and accused the company of openly lobbying for its own interests. However, the government ignored their demands, and after a few years, the other companies began setting up their own tea-packaging plants.
In summer, BAT changed the distribution system at its BAT-Yava and BAT-STF factories, transferring nearly all of its sales to five large dealers. Philip Morris soon followed BAT's example. Golden Yava (Yava zolotaya) cigarettes went into production at BAT-Yava in the fall. Today, they are Russia's most popular brand of filter cigarettes.
Russia was shaken by a major scandal when it was discovered that so-called Belgian meat delivered to a number of Moscow meat-packing plants was actually British beef that was possibly contaminated with BSE, also known as mad cow disease, believed to cause Creutzfeldt-Jakob disease in humans. Although the scandal became public three months after the meat had been processed into sausage, delivered to stores, and sold and eaten, meat sales fell by 20-50%.
In October, Coca-Cola opened four new soft-drink bottling plants-in Vladivostok, Nizhny Novgorod, Rostov-on-Don, and Krasnoyarsk. The company's total investments in Russia had now reached $600 million.
Two founders of Soyuzkontrakt, Yury Rydnik and Konstantin Romanov, left the company, which had become Russia's largest food importer. According to official information, turnover was $800 million in 1996, but unofficial estimates give a figure of $1.2 billion. Rydnik and Romanov owned 20% of Soyuzkontrakt's shares and had been involved in the company's operational management. The two of them set up the rival Baltic Group (Baltiyskaya gruppa), which did not survive the 1998 crisis. Although Soyuzkontrakt changed owners, it still exists.
The Baltika brewery bought a controlling block of shares in the Don Brewery (AO Donskoye Pivo) in Rostov-on-Don and provided $30 million to expand production. This significantly increased Baltika's sales in Russia's southern regions.
Dovgan-Zashchishchennoe kachestvo (DZK) was closed. The company founded by Vladimir Dovgan and German Lillevyali, the owner of Aktiv Bank, used to sell more than 200 food products under the Dovgan brand name. Business was successful at first, but then expenses began to exceed revenues and the partners quarreled. With money raised by Boris Jordan through the Sputnik foundation, Dovgan set up the Dovgan trading house, which produced vodka. However, in 2001, the Dovgan brand was sold to the Deiros company.
Lillevyali tried to start up food production under the Smak brand name but failed, because he could not reach an agreement with Andrei Makarevich, the owner of the Smak trademark.
Several freight cars filled with Dovgan glycerine soap produced when DZK was still in existence are still sitting in a freight yard outside Moscow.
1998
The Russian government set a quota of 600 000 tonnes on duty-free imports of sugar from Ukraine. However, Ukrainian sugar prices were considerably higher than Russian prices all year and the quota was never applied.
Nine of RJR's dealers, who distributed the Petr I brand of cigarettes, announced a boycott of the company and refused to buy its cigarettes as a result of changes in RJR's delivery terms. The conflict was resolved two months later, but the Petr I brand had already lost market share.
Pernod Ricard won a tender for YeKZ (cognac factory of Erevan), making the French company the main supplier of Armenian brandy to Russia.
Philip Morris started building a new tobacco factory in Leningrad Region. The factory cost $300 million and was completed at the beginning of 2000. As a result, the famous Marlboro brand of cigarettes is now produced in the town of Gorelovo near St. Petersburg instead of being imported.
The pride of the Russian meat-processing industry, the Mikoms (formerly Mikoyan) meat-packing plant of Moscow, declared bankruptcy. Most of the company's employees were fired and its creditors, who included several large banks and meat importers who supplied the plant, divided up the assets. ABK Eksim, a major meat importer, now controls the plant.
The Red October group (Krasny Oktyabr) announced that it had bought the Petrokonf factory in St. Petersburg from the Kraft Jacobs Suchard group. Kraft Jacobs Suchard had bought the factory in 1995, when it was known as the Samoilova factory, and had sold it as a nonessential asset.
Food imports to Russia stopped right after the August default. A number of importers were forced to leave the market altogether after prices for most imported food products increased fourfold, while demand fell sharply. Foreign products disappeared from the stores, but Russian producers managed to increase output in record time and fill the gap, thus preventing shortages.
1999
BAT (British American Tobacco Plc.), the world's second-largest tobacco company in terms of sales, announced it was merging with Rothmans International. In effect, BAT paid $8.67 billion to take over Rothmans. The two companies combined their Russian offices, and the Rothmans-Nevo factory passed to BAT. RJR, BAT's main competitor, sold its international division, RJR International, to the Japanese company Japan Tobacco. RJR International's Russian office is now called Japan Tobacco International, although not a single Japanese works there.
The large British juice producer Del Monte left the Russian market because of losses suffered during the 1998 crisis. Del Monte was about the only company that could have competed with Russian producer Wimm-Bill-Dann (WBD), but WBD was lucky.
The Belgian beer company Interbrew and the Sun group, the largest brewers in Russia after Baltika, set up the Sun-Interbrew joint venture, which included nine breweries in Russia and Ukraine. Analysts called it the largest merger in the history of the Russian beer industry. The reasons for the merger were simple: Sun did not have enough money to renovate six of its own breweries, while Interbrew had come to the CIS market too late and had managed to buy only the Rosar brewery in Omsk and reach an agreement to buy the Klinsky brewery (Klinsky kombinat).
The Moscow Region Court of Arbitration rejected Philip Morris' complaint against cigarette producer Invest-Trust (Invest-Trast), which was producing Soyuz-Planeta and Euro-Street (Evro-Strit) cigarettes that very closely resembled the Soyuz-Apollon and Bond Street brands belonging to Philip Morris. A week later, a photograph of packages of Philip Morris and Invest-Trast cigarettes lying side by side appeared in The Wall Street Journal. The accompanying article told how there was still no protection of intellectual property in Russia.
The Zhiguli Brewery (Zhigulevskoe pivo) in Samara, which owned the Zhiguli trademark, demanded royalties from the other breweries producing beer under this brand name. When there was no response from most of the breweries named in the letter, the lawyers of Zhigulevskoe pivo's took their demand to court. In turn, at the request of the breweries, the Rospatent appeals chamber removed the trademark protection from the name "Zhiguli." Zhigulevskoe pivo is still fighting to have the decision overturned.
The Wimm-Bill-Dann group acquired a controlling block of shares in the Volga brewery in Nizhiny Novgorod. WBD later bought shares in the Pivoindustriya Primorya and Moskvoretsky breweries. All three companies were united into the TsEPKO holding.
The Ostankinsky and Ochakovsky dairies and the New Zealand Milk company tried to create a unified distribution network by setting up the Dairy Alliance (Molochny alyans) company, but the plan failed. "We follow Western management principles, but Ostankinsky follows Soviet principles," a New Zealand Milk representative explained. In the end, the new company distributed only New Zealand Milk products and Ostankinsky and Ochakovsky sold their own products themselves.
2000
The small but very modern Roska dairy of St. Petersburg became embroiled in a scandal. One of the company's principal shareholders, the Petmol dairy, sold its 47% shareholding to the Kolibri concern. Petmol's actions angered the local Sberbank, which owned about 40% of Roska's shares. At the time of the sale, Kolibri already owned 5% of Roska's shares, which meant that the new acquisition gave Kolibri a controlling share. Sberbank challenged the deal, but without success.
The government issued a decree establishing the federal state unitary enterprise (FGUP) Rosspirtprom. Sergei Zivenko, a complete unknown in the alcohol business, was appointed the company's general director. Several months later, the Ministry of State Property transferred the state shares in more than 120 distilleries to Rosspirtprom. Rosspirtprom changed the management at these companies, in some cases with the help of bailiffs and the OMON (riot police).
The Moscow city government, which owned the controlling share block in the Kristall distillery, fired its general director, Yury Yermilov, and replaced him with Aleksandr Romanov. However, the old administration, headed by the company's accountant Vladimir Svirsky, refused to recognize Romanov. In response, Romanov's supporters took Kristall by storm, and the Moscow government transferred the controlling share block to Rosspirtprom. Rosspirtprom's management then fired Romanov and replaced him with Sergei Lukashuk, one of Svirsky's supporters.
However, Lukashuk himself was fired in 2001, and the legal battle over Kristall continues. Every four months, Svirsky's supporters and bailiffs try to enter the company offices but the new administration refuses to let them in.
Licensing was introduced for wholesale sales and production of tobacco products. Experts claimed that this would decrease the number of market players, but the licenses had no serious effect on the market and in fact were abolished the following year
Unilever turned to the Anti-Monopoly Ministry to force the Russian company Petrosoyuz to stop advertising Derevenskoye soft butter on television. The label depicted a "real" cow, but in fact, Derevenskoye was not butter but margarine. Unilever was outraged, because its own Rama margarine did not show a cow on the label.
Alfa-Eco bought 50% of the shares of P.A. Smirnov through three Cyprus-based offshore companies, but the new shareholders were unable to reach an agreement with company founder Boris Smirnov. They finally took P.A. Smirnov's offices by storm, and Boris Smirnov was removed from the company's management.
by Dmitry Dobrov
PRESENT
Large foreign companies either wholly or partially control most sectors of the Russian food market, and as a result, there are few outstanding figures in the business. Many important business decisions are made by unknown foreigners at head offices in London, New York, or Geneva. Nevertheless, the domestic food industry does have its own heroes.
Old Fossils
The most colorful group of food-industry managers are those who were appointed to their positions by "party and government" and who have not only held onto power, but also own large blocks of shares in their companies. A prime example is the Red October (Krasny Oktyabr) group and its long-time head Anatoly Daursky, who rose from the rank of mechanical engineer at Krasny Oktyabr to general director of the USSR's largest confectionery factory and president of the governing board of one of the most important players on the Russian confectionery market.
Aleksei Kochetov, head of the Moscow-based Ochakovo brewery, and Anatoly Shamanov, manager of the Ice-Fili (Ais-Fili) refrigeration company, are important figures as well. Like Daursky, they headed their companies in Soviet times and now have large shareholdings in them. Taimuraz Bolloev, general director of the Baltika brewery, also belongs to this group, although he began his career at the Stepan Razin brewery and came to Baltika only in 1991.
What are the characteristics of this group? It is generally agreed that their strong points are a thorough knowledge of the production process thanks to their engineering backgrounds and a rare ability to get along with the local authorities. Even during Moscow Mayor Yury Luzhkov's most difficult periods, neither Kochetov nor Daursky ever said a word against him; and when Daursky was asked which political party he supported, he replied, "Otechestvo" (Fatherland, Yury Luzhov's party). His loyalty was rewarded. It was rumored that large-scale modernization of Ochakovo's facilities was carried out with Moscow's direct or indirect support. Ochakovo's competitors believe that the company would not have had enough money of its own for this work.
The support of Moscow government also ultimately assured Anatoly Shamanov's victory over another Ais-Fili shareholder, the AlterVest company, which forced Viktor Lutovinov, the head of AlterVest, to give up his bid to become Ais-Fili's general director. The situation is much the same at Baltika, which contributes about 10% to the St. Petersburg city budget. Vladimir Yakolvev, the governor of St. Petersburg, attends most of the company's official functions; and when brewers were involved in a dispute with Gennady Onishchenko, Russia's health inspector, Yakovlev was the first governor to openly call for Onishchenko's dismissal as head of the State Health Inspectorate.
The main weakness of this group is their unusual approach to marketing policy. As a rule, the companies they manage are plagued by price wars between dealers, shortages of goods in warehouses, and other distribution problems. Advertising policy is another weakness of this type of manager. For example, they are often overly involved in developing advertising campaigns, but as men in their fifties and sixties, they have their own peculiar ideas about the role of advertising, which shows in their companies' television ads.
The ranks of these "patriarchs" are gradually thinning, first of all because of their age and second, because of pressure from young, aggressive competitors or shareholders.
For example, Vladimir Mikhailovsky, now the ex-general director of Extra M (Ekstra M), Russia's largest pasta factory, sold his shares to Neftekhimbank this summer and accepted the honorary position of chairman of the board of directors. Like Anatoly Daursky, Mikhailovsky worked at Ekstra M as an engineer before becoming general director of the company.
In the middle of last year, Yury Yermilov, another former engineer who became head of the Moscow-based Kristall distillery, also stepped down as the company's general director. Yermilov became Kristall's general director in the mid-1990s after the death of the previous general director Vladimir Yaminkov, and in turn became a victim of a dispute between the Moscow government and the factory's administration.
Young Lions
Young company heads and owners who built up their own large businesses and control large market segments are another notable group of Russian food-industry managers.
One of the best examples of this type of manager is Rustam Tariko, the head of the Rust company. At the beginning of the 1990s, Tariko, then a student, had the bright idea of selling the imported food products normally only found in hard-currency stores for rubles. First, Tariko visited the Konsumekspo exhibition and convinced the Italian company Ferrero to sell him a consignment of Kinder Surprise chocolates on credit. The first shipment sold out, followed by a second and a third. Then a Ferrero manager told a friend who worked for Martini about Tariko, and the future head of Rust received a shipment of Martini, also on credit. Tariko sent the shipment to Yeliseev's delicatessen (Yeliseevsky gastronom, an elite food store in St. Petersburg), where he personally unloaded it. Even though the ruble-equivalent cost of a bottle of Martini was an enormous amount of money in those days, the stock was literally swept off Yeliseev's shelves and Tariko was granted exclusive distribution rights. Smirnoff, Johnnie Walker, and other well-known brands followed; today, Tariko controls 60-70% of Russian sales of elite alcohol brands. There are at least ten companies established by other self-made men in a similar way on the elite alcohol market, which formed only in the mid-1990s. Tariko stands out among his competitors more for the large number of number of exclusive contracts he has with Western producers of expensive alcohol than for his creative approach.
Sergei Zivenko, the general director of the federal state unitary enterprise (FGUP) Rosspirtprom, is another outstanding representative of the new breed of young managers. Until recently, the market for mass-produced alcohol (primarily vodka) was completely controlled by a large number of old-guard managers, that is, distillery directors who had held the post for 20 years and had worked their way up from trainees on the bottling line to head of the company. No one knows what Zivenko did before he became Rosspirtprom's general director, and Zivenko himself never talks about his past. Only one thing is clear: before his appointment as head of Rosspirtprom, Zivenko had nothing whatsoever to do with vodka production.
Nevertheless, Zivenko controls more that 130 distilleries and is respected and even a little feared in the industry. When the management team was being formed at Rosspirtprom, Zivenko, along with young managers hired several older ones, who knew how to talk to Russian distillery directors. In many respects, this is the reason for Rosspirtprom's success in numerous competitions for distilleries.
by Yekaterina Ignatova
TRENDS
The food market was already fully formed three years ago, after the crisis of August 1998. As a result of modest initial investments and the extreme liquidity of food products, the food, drink, and tobacco market was quickly filled and profitably divided between Russian and foreign companies by the mid-1990s.
Nevertheless, by the end of this year, some markets will experience major structural changes once again, for two reasons: an overproduction crisis and renewed attempts by the authorities to regulate several commodities at once.
From Rags to Riches
The Russian tobacco market is a striking example of the coming overproduction crisis with all its consequences, i.e., bankruptcies of companies, distributors, etc., even though ten years ago, cigarettes were in desperately short supply. Then, the transnational companies Philip Morris, British American Tobacco (BAT), and R.J. Reynolds (now Japan Tobacco International) came to the rescue with centralized deliveries of tobacco products under an agreement with the Soviet government. These very same companies are also the source of the overproduction crisis. After assessing market prospects-Russia is the world's second-largest market for tobacco products after China-foreign companies either quickly bought up the most promising factories, e.g., Yava, Dukat, or Uritsky, or built new modern factories and soon flooded Russia with cigarettes.
According to official information, there were 340 billion cigarettes (330 billion domestic and 10 billion imported) on the market last year, whereas demand in Russia is at best 270-280 billion. Most analysts believe that demand is no more than 250 billion.
Until recently, Ukraine and other CIS countries saved the Russian tobacco industry by buying 30-60 billion cigarettes per year, because of differences in tobacco excise taxes in Russia and adjoining countries. For example, until the middle of last year, the Ukrainian excise tax on unfiltered cigarettes, the main Russian export, was $1.80 per thousand cigarettes, whereas the Russian tax was only $0.25 per thousand.
However, the Ukrainian government was not happy with this state of affairs, and excise taxes on unfiltered cigarettes rose steadily. Today, excess Russian production is accumulating in the warehouses of distributors and producers. Although foreign companies, which own 11 large factories, can tolerate this situation indefinitely without much difficulty, the glut is proving to be fatal to Russian companies and distributors.
The first to disappear were small regional factories that produced low-quality, unmarketable cigarettes. In the middle of last year, there were about 120 tobacco factories of various classes, but today there are only 70 and the number will continue to decrease for various reasons.
First of all, small manufacturers have no money for development. Second, they can no longer produce Prima cigarettes, the most popular brand in Russia, because this trademark is now owned by the Tabakprom association, whose members include 25 large producers. In order to become a member of the association and receive the right to produce Prima cigarettes, a company has to pay a $500 000 entrance fee, which is more money than small companies see even in their best years.
Tobacco producers will have to resolve still another problem within a year - the government wants a lot more money from the tobacco business than it receives now. Deputy Finance Minister Sergei Shatalov said in July that tobacco manufacturers were living in "tax heaven" and that excise taxes on tobacco products would be significantly increased by 2003. There is some justification for this, since the excise tax on a pack of cigarettes amounts to 40% in Russia, whereas in most Western countries, this figure is twice as high.
The situation is much the same for Russian distributors. Small companies operating on regional markets (there are more than 1000 of these companies) are either going bankrupt or becoming branches of large Moscow distributors, and there is no way to change this trend. As a result of the current glut, returns in the wholesale sector are only 2-5%, which is not enough to cover overhead expenses for transportation and warehousing of cigarettes.
The Bitter Life of Candy Makers
The government is only planning to regulate the tobacco business, whereas the sugar market has been regulated for a long time now. Each year, the government establishes new rules of the game, and each year it admits that they have not produced the expected results. Next year will probably be no exception.
The Russian sugar market, whose volume is estimated at 5-7 million t per year, has two main sources of raw materials: raw sugar from Latin American countries, which is used to manufacture about 70-80% of the sugar sold in Russia, and sugar beets grown in Russia. Russia cannot survive without imports, since sugar beet farms are in no position to meet the requirements of processing plants. However, ending sugar beet production is out of the question. First of all, it would lead to mass unemployment in Russia's "beet belt" and second, the country would be totally at the mercy of world prices for raw sugar.
The government has imposed limits on raw-sugar imports in an attempt to find just the right balance between imported raw sugar and domestic sugar beets. However, limits have to be applied carefully in order to avoid shortages; otherwise, not only sugar, but also confectionery, bakery, and other food products that use sugar as a raw material will become more expensive.
In 1997-2000, the government used seasonal duties, typically 40-70% of the customs value, as the main means of limiting raw-sugar imports. These duties were imposed from August to November when sugar beets were being harvested and processed, but they were ineffective, because importers stocked up on raw sugar just before the seasonal duties were applied and then sold it in the second half of the year. Sugar prices fell as a result, and sugar beet producers accused the government of ignoring their interests.
In order to remedy the situation, in December of last year, the government introduced tariff quotas of 3.65 million t on raw sugar imports to the end of 2001. Raw sugar imported within the quotas was subject to a 5% duty, whereas above-quota goods were subject to a duty of 30% or no less than 90 euros per t. It was thought that this measure would help limit raw sugar imports and make sugar-beet growing profitable at last.
However, this was not the case. Raw sugar consignments delivered under the quotas were sold at special auctions held last November, but the cost rose to a level that eliminated any price advantages of sugar imported within the quotas. As a result, above-quota deliveries reached more than 1.5 million t, or about 20% of market demand; auction winners suffered significant losses; and sugar prices remained at $430-450.
Sugar-beet growers again looked to the government for help and demanded the introduction of seasonal duties in the second half of this year. But suppliers rightly pointed out that changing the rules this year was unfair, and the government agreed with them.
On August 1, the commission for protective measures in foreign trade established raw-sugar import regulations for 2002 that were essentially a combination of all the measures the government had used in 1997-2000.
In 2002, import quotas on raw sugar will be 3.65 million t, the same as in 2001 and the duty on quota sugar will also be 5%. On January 1, 2002, duties on above-quota imports will increase to 40% of the customs value or at least 120 euros per t; and on July 1, 2002, at the start of the beet harvest, seasonal import duties of 50% or at least 150 euros per t of raw sugar will go into effect in Russia.
The combination of duties on above-quota raw sugar imports and prohibitive seasonal duties will probably reduce above-quota deliveries to a minimum. This means that there will be no surplus sugar on the market and prices will rise, which will please Russian sugar-beet growers. However, analysts caution that sugar price increases may be greater than expected.
Many specialists also maintain that a quota of 3.65 million t is too small for Russia. For example, the sugar balance on the market this year was about 6.5-7 million t, including 3.65 million t within the quota, 1.5 million t of beet sugar, and 1.5 million t above the quota. However, next year, there will probably be no above-quota deliveries, which means a shortfall of 1.5 million t that will be covered by sugar smuggled from CIS countries.
German Gref, the Minister of Economic Development, has said that there will be no tariff quotas on raw-sugar imports in 2003, because they are ineffective. Instead, the government is working out new measures to regulate the sugar market.
A Blow to the Legs
Raw-sugar importers are used to tariff quotas, but they are something new for meat importers. In mid-summer, a group of State Duma deputies introduced amendments to the law on customs tariffs that called for tariff quotas on products imported from both developing and other countries. The main goal of the amendments was to introduce tariff quotas on chicken imports.
Two months before the deputies introduced the amendments, specialists at the Ministry of Agriculture were already talking about the need to limit chicken imports from the US and conduct an antidumping investigation. However, the directors of poultry processing plants could not provide evidence that American chicken legs were being deliberately underpriced. Minister of Agriculture Aleksei Gordeev suggested that chicken should be subject to the same kind of tariff quotas as raw sugar. There was only one problem: the law on customs tariffs stipulated quotas only on agricultural products from developing countries. The US was obviously not a developing country, but it supplied two-thirds of the chicken imports to Russia. The Ministry of Agriculture then tried to resolve the problem through the Duma by introducing the necessary amendments to the law.
In principle, the amendments also applied to other meats besides chicken, and it was alleged that the Ministry of Agriculture was planning to extend the quotas to beef and pork. However, import restrictions on beef and pork would not have any effect on the market, since according to the various proposals, quotas on beef or pork would coincide with actual import volumes for the past year or two and the duty on above-quota imports would be 50%. Chicken was another matter, since actual import volumes were 1.1-1.2 million t, whereas the proposed quota of 400 000 t was less than half that amount. In addition, prohibitive duties of 100% of customs value would effectively eliminate above-quota imports.
The proposed amendments will probably be adopted in late fall, which will allow the introduction of import quotas on chicken in 2002. As for the consequences, officials at Rosptitsesoyuz believe that domestic poultry processing plants will be able to compensate for the shortages without significant price increases.
On the other hand, importers maintain that the Russian poultry industry will not be able to compensate for the resulting shortfalls of 500 000-600 000 t per year if quotas are introduced. Therefore, chicken imports will decrease only slightly, but most of them will be contraband and both the budget and Russian poultry processors will suffer as a result.
Regardless of whether or not the importers are right, it is clear that quotas will lead to major market shifts.
Vodka in Fire
The tobacco market is in the midst of an oversupply crisis, the sugar market suffers from excessive government intervention, but the vodka market has problems with both.
On June 1, a new system of excise tax payments, the so-called split excise tax, was introduced in Russia. Previously, the producer paid 100% of the excise tax on alcohol and attached an excise stamp to the bottles. Under the new system, the producer pays only 50% of the excise tax after attaching the stamp and the goods are sent to a regional excise warehouse. Another special regional stamp is attached to the bottles, and the wholesaler pays the remaining 50% of the excise tax when he collects the goods from the warehouse.
Part of production can be sold directly from the distillery, which in this case pays 100% of the excise tax and attaches both excise and regional stamps to the bottles. All excise tax payments will go to the federal budget, which will then transfer 50% to the regions.
The system was introduced in order to eliminate the bans on sales of "outside" vodka imposed by regional authorities. Under the new system of excise tax collection, regional budgets will receive revenue from both production and sales of vodka.
All of the country's legal distilleries without exception protested the new excise payment regulations, because the government had introduced them before it had had time to start producing the regional excise stamps and very few regions had excise warehouses.
By the end of summer, the Ministry of Taxation had issued permits for nearly 1000 excise warehouses and had just managed to start producing the special stamps. However, there were still not enough warehouses or tax inspectors, who controlled distribution.
The excise tax was not the only problem worrying market players. They were also concerned about the state company Rosspirtprom, which had been set up the year before and now controlled 130 distilleries.
At the beginning of the year, Rosspirtprom became involved in disputes with the management of companies that it owed but did not control. The directors resisted until midsummer, when annual meetings were held at all the companies and Rosspirtprom representatives took up seats on the boards of directors.
Rosspirtprom, or the "alcohol ministry as it is often called, is now faced with the equally difficult task of managing the vodka industry, which has caused a great deal of apprehension among producers.
Like the tobacco market, the alcohol market is also suffering from overproduction. In Soviet times, there were about 200 distilleries in Russia, and there were no vodka shortages. Now, according to the Ministry of Taxation, there are slightly more than 600 companies, not counting illegal producers. As a result, legal distilleries are operating at an average of 30% of capacity.
Rosspirtprom is clearly not coping with illegal producers; however, it can free up the market for its own legal distilleries by eliminating direct competitors, and it has more than enough resources to do this.
First, with the agreement of the Ministry of Agriculture, Rosspirtprom is involved in issuing quotas on alcohol for all companies in the industry, which would give one operator a means of applying pressure on another. Although Rosspirtprom has so far not used this lever, the possibility cannot be ruled out. The management of Soyuzplodimport, a shareholder of the RVVK-SPI factory in Kaliningrad, has already contested the agreement in the Moscow Court of Arbitration.
There is also another means of applying pressure. Rosspirtprom's general director, Sergei Zivenko said in an interview that he had not ruled out the possibility of closing outdated and inefficient distilleries in Russia, but when asked if Rosspirtprom owned any of these distilleries, he firmly replied "No."
by
Dmitry Dobrov
All the Article in Russian as of Sep. 25, 2001
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