I. Introduction
While the market for food and beverage products in Russia is most developed in Moscow, in comparison to that of the United States it can be unpredictable and rough. The companies which have been most successful in establishing distribution channels are private Russian companies, certain large Russian government or quasi-governmental organizations and Western companies which have invested heavily to establish a beachhead in what for experienced companies is already a lucrative market.
The private Russian companies have the advantage of knowing how to navigate the byzantine Moscow bureaucracy. State organizations which import products from the West have the benefit of access to already established distribution networks. It is the Western firms with deep pockets, most of them new to this market but firmly committed to establishing a permanent presence and market share, which appear to be having the greatest success of the foreign companies involved in Russia. The products which they offer are of high quality and novel value to this market, and they are in great demand among those who can afford them. Smaller US companies, despite the quality of the products they offer, have a more difficult time operating in what has become an extremely expensive place to do business. Nonetheless, the market potential in Russia is such that, with persistence, efforts by smaller companies can pay off over the long run.
This report will provide American exporters with the regulatory requirements and processes for introducing their products to the Moscow market. Russia has always been notorious for its bureaucracy and red tape, and with good reason. Despite the fact that the requirements described below may be comprehensible, American companies are strongly advised to study the market carefully before getting involved. The regulatory foundation is rapidly evolving into a more Western model, but the laws change often and are not always enforced equally. In Russia, the importance of having contacts at the appropriate licensing, tax and customs entities cannot be underestimated.
For those new to this market, a very brief background is in order. Following the "perestroika" and market liberalizations initiated during the Gorbachev era, which eventually culminated in the collapse of the Soviet Union and the re-emergence of the Soviet republics as independent countries, the economy has undergone a period of wrenching change. During the Communist era the economy was run by "central planners" in Moscow who dictated to farms and factories what products would be made; where, in which quantities, to whom they would be sold and at what prices. Free market forces were not permitted to function. Today, as the economy makes the transition to capitalism, the producers are struggling to make products which will satisfy the requirements of Russia's consumers. It is an awkward time for foreign firms to become involved. It is also an enticing opportunity.
Marketing for the food market system in Russia is made difficult by the fact that the agro-industrial complex (AIC) has been neglected more than other economic sectors. Farm equipment and processing equipment, from tractors to refrigerated transport to packaging machinery, is outdated and unable to satisfy domestic demand. Production has been falling for the past several years. Another complicating factor is that the food market system in Russia has yet to be properly and objectively reflected in informational materials and statistical reporting documents.
In 1993 domestically-produced foodstuffs fell to 60% of the Russian market. The growth of the private-sector economy is reinforced by the falling production of collective and state farms and the growth in the value of gross production of private farms and auxiliary farms (i.e. small farms kept by individuals). In 1993 farms and personal auxiliary farms produced 88% of the potatoes, 65% of the vegetables, approximately 40% of the meat and milk and more than 30% of the eggs produced overall. In 1994 these percentages have been even higher for some categories. These results were produced under conditions where the share of fixed assets held by farms and auxiliary farms was approximately 11% of the total value of those held in the Russian AIC.
These facts state that the Russian government and its legislative bodies (Federation Council and State Duma) have not agreed on a unified policy for developing the AIC nor have developed a strategy for the future. Obviously, the Russian production deficit creates opportunities for introduction of American products to the market. At the same time, it is difficult to predict which sectors of the food market may benefit from a backlash of protectionism which could materialize in the future.
Given the fluid nature of this market, this study presents an overview of how marketing and distribution of consumer-ready food products are being handled, and the various regulatory statutes which must be satisfied for American companies to enter the market. This report will address the following:
an explanation of the system for State regulation of food imports, customs duties and fees, the entire structure for taxes, payments and fees and the procedure for levying them; an analysis of State regulation of food safety, the certification system, procedures for obtaining certificates, the structure of Gosstandard bodies and their addresses; a study of customs clearance procedures and customs payment structures, the system for documents submitted by Russian enterprises for food imports and documents of food importers; an analysis of the goods distribution system, including main importers, their ties with other Russian regions apart from Moscow and with the former Soviet republics; a study of the wholesale and retail trade systems, an evaluation of their positive aspects and shortcomings, an explanation of the communications structure between wholesale and retail procedure for selling goods, the mechanism for forming prices and taxation; a statistical evaluation of the portrait of the Russian consumer, an analysis of the incomes by region and an analysis of factors which influence consumer preference when selecting goods; a study of the wealthy sector of the Russian public; an analysis of goods movement from unloading for trade to the final consumer and the mechanism for setting prices; a topical evaluation of the status and prospects for development of the food market system, the role of food imports, investment in the food industry and on the development of the Russian AIC; an analysis of consumer preferences, an explanation of the structure of attractive goods, definition of the liquidity ratio, appeal factor and average profit norm.
In addition to these issues the report includes a large volume of statistical data describing the per capita consumption of retail foodstuffs, production and import volumes, price changes, the status of the Russian food industry and agriculture and volumes of investment in these sectors.
II. Government Regulations Affecting Imports
Government policy on the regulation of imports is aimed, on the one hand, at ending a rather long period of instability, thereby making it possible for Russian organizations to conclude long-term contracts and establish solid relationships with foreign partners, without the fear that the latest executive decision will threaten either side's ability to fulfill its contractual obligations. On the other hand, it is aimed at harmonizing and unifying customs-related issues with internationally accepted norms and practices (in 1993, Russia applied for membership in the General Agreement on Tariffs and Trade). The legal basis for the effective functioning of the regulatory mechanism of foreign trade activity was only established in the middle of 1993, when the Supreme Soviet of the Russian Federation, with its resolution no. 5003-1 of 21 May 1993 passed the law On Customs Tariffs, and then, with resolution no. 5251-1 of 18 June 1993, brought into effect the Customs Code of the Russian Federation. This report uses the terms exporter and importer, which in certain cases may be the same company and in others may be different. An American exporter of a certain product will not necessarily be the importer of that same product in Russia. Many US companies which export to Russia sell their goods to Russian customers (distributors or end-users) on CIF terms, meaning that their custody of the product extends until the product reaches the customs point at the Russian border. At this point, the Russian customer accepts custody and is responsible for processing the customs declaration procedures, including payment of import duties, taxes and fees. There are advantages and disadvantages to being the importer of record, and it is an important consideration to be made before entering the Russian market.
Customs Duties
The Import Customs Tariff, a systematic list of goods and the duties which apply thereto, has been in effect in Russia since 1 April 1993. It was brought into effect by Decree no. 340 of the President of the Russian Federation (dated 15 March 1993) and sent for execution to all customs posts in Russia by Order no. 92 of the State Customs Committee (dated 20 March 1993).
The Russian Customs Tariff is based on the "Schedule of Goods of Foreign Trade Activity" (SG FTA), which is the "Russian variant" of the Schedule of the Harmonized System which is used in the United States. According to the structure of the SG FTA, each good has its own distinctive 9-figure code, making it possible to precisely identify specific goods. Customs statistics are maintained in the data base of the SG FTA, and all documentation which accompanies the goods into the country (including the freight customs declaration) includes the applicable code. The Customs Tariff of the Russian Federation is comprised of a rate sheet of customs duties applicable to specific goods crossing the border of the Russian Federation. A special feature of the Import Customs Tariff is the fact that it provides for differential tariffs dependent on the country from which the goods are imported into Russia. The base rates are those for countries that enjoy "most-favored nation" status with Russia (this includes the United States). Goods produced in developing countries enjoy preferential customs rates: customs duties are one-half those of the base rates. The only goods which are completely exempt from customs duties are those which are produced in and imported from the least-developed developing countries (as given in the corresponding UN schedule). Goods which are produced in countries that do not enjoy "most-favored- nation" status, as well as goods whose country of origin is unknown or unsubstantiated, are assessed customs duties at a rate twice that of the base rate.
Generally speaking, the tariff duties are based on several factors, including the significance of the product for the economy of the country; the balance of imports and exports; the creation of favorable conditions for the development of the Russian economy and foreign trade relations.
The regulations were developed in accordance with Order No. 94 of the State Customs Committee entitled On Rates of Import Customs Duties (dated 11 March 1994) and Decree No. 486 entitled On the Introduction of Changes to Order No. 94 (dated 23 September 1994). This decree was dedicated largely to lowering the rates of the import tariff on food products. For example, duties on meat were lowered from 15% to 8% and on sausage from 20% to 8%. However, the rate on chicken meat was increased to 20%.
The customs value of the product (as declared by the exporter) is the basis for the calculation of import duties. The customs rate for each product is determined in accordance with the code of the SG FTA as announced by the State Customs Committee.
Excise, Value-Added Tax, Special Tax, and Customs Processing Fees
In 1993, the list of taxes and fees payable by foreign exporters was broadened, significantly increasing the up-front cost to the foreign exporter as well as the price of imported products in the marketplace. In addition to the customs duties described above, a value-added tax (VAT) and excise taxes were implemented in February of that year. A "special tax" was introduced on 1 January 1994. Finally, a customs processing fee must be paid on all imported goods. At the present time this amounts to 0.15% of the total invoiced value of the goods -- 0.1% to be paid in rubles and 0.05% to be paid in hard currency.
In the first six months of 1994, there was a noticeable toughening of the policy on the import of goods subject to excise tax. Prior to this time, loopholes existed which allowed importers to evade import duties and taxes. For example, importers could claim that the goods were coming in as samples or for display only; not for sale. However, the State Customs Committee closed (or at least restricted) those loopholes when it issued revised regulations which require that all goods (including those entering the country on a temporary basis for exhibition or otherwise) be properly declared and monies be deposited to cover applicable duties and taxes in the event that those products are not re- exported. Beginning 1 August 1994, with Regulation No. 863 of 18 July 1994 and Order No. 388 of the State Customs Committee of 1 August, the government lowered the excise rates on several categories of products. This occurred in parallel with regulatory changes on the labeling of cigarettes and alcohol (except beer), which has made evasion of payment of customs duties much more difficult than was previously the case. Specifically, all cigarette packs and liquor bottles are stamped as in the United States. Moreover, all excise henceforth will be calculated not as a percentage of a product's declared value, but in European Currency Units (ECUs) for each unit of these particular products. This was intended to eliminate the frequent practice of declaring artificially low values to customs authorities, one of the favorite methods of minimizing customs payments. Beginning 15 August the rates of security for payment of customs charges were significantly lowered (on the import of excise goods, the importer is obligated to pay a security deposit into a bank account of Russian customs or pay a processing directly at the border). The basis for the collection of excise (except on cigarettes and alcohol), as in the case for the collection of customs duties, is the declared value of the goods imported.
The majority of food products imported into the Russian Federation for open circulation are exempt from VAT. The currently valid schedule of goods exempt from VAT was approved by Order No. 118 of the State Customs Committee of 1 April 1993 On Changes to the Schedule of Exemptions from the Value-Added Tax. For products on which VAT and special tax must be paid, the current rates are 20% and 3% respectively, based on the sum of the declared value of the product, the import duty, and the excise tax.
Customs duties, the customs processing fee, and, if applicable, the VAT, special tax, and excise are payable on the customs processing of the freight on the basis of information given on the declaration. Legally, customs officials do not have the right to release goods for circulation without presentation of payment orders affirming payment of these fees (e.g. a wire transfer receipt stamped by the bank)
III. Government Food Safety Regulations
American companies should not be surprised to learn that the process of certifying foodstuffs for sale in Russia is bureaucratic and cumbersome. In all, according to Russian law, five separate certifications must be obtained before a product can be sold into the Moscow market. These are: Safety Certificate, Hygiene Certificate, Certificate of Conformity, Certificate of Origin and Veterinary Certificate. The process can be extremely cumbersome and assistance should be obtained from local counsel or a local warehousing company.
Certificate of Conformity
The Law of the Russian Federation "On Consumer Rights Protection," adopted in June 1992 introduced the obligatory certification of goods for which requirements had been established by legislative acts or standards in order to provide for consumer safety and environmental protection. This law has named the Russian State Committee on Standardization, Metrology & Certification (Gosstandart) as the national body for certification of goods. Its functions include establishing certification and enforcement procedures.
The certification system of Gosstandart Russia which defined the procedure for obligatory certification was developed on the basis of international experience and with the aid of leading experts on testing products, scientific schools, consumer societies and industry. The system is structured to grant enterprises and organizations of various forms of ownership the right to conduct practical certification work. Specially established commissions grant these organizations accreditation to perform this work.
In accordance with international practices, the Russian law apportions responsibility as follows: the manufacturer (performer, supplier) bears responsibility for assuring that the goods comply with the requirements of legislative acts or standards; the seller shall be responsible for the presence of the certificate and the sign of conformity for the goods he sells; the testing laboratory shall be responsible for the accuracy and objectivity of the testing; and the certification body shall be responsible for the correctness in granting the certificate. The certificate of conformity must be presented at customs upon import of the goods into the Russian Federation and shall be required upon sale of the goods.
The system does not restrict the organization and carrying out of voluntary certification in other systems and is open for participation by other countries and organizations.
In implementation of Gosstandart Russia's certification system over 500 certification bodies have been accredited for similar types of products and more than 1200 testing bodies - of them, 35% focus on foods and beverages.
A schedule of goods and services subject to mandatory certification (including more than 2000 items) has been approved by Gosstandart and is currently in effect. The so-called "GOST" is a classification system which sets forth basic standards or specifications for different products. For the most part, these are consumer goods (including foodstuffs and beverages). Independent of whether they are produced domestically or are imported, all goods included in this schedule are subject to mandatory certification. Therefore, all food and beverage products imported from the United States must obtain a GOST certification by the appropriate bodies in order to be sold in Russia.
The official language of the system is Russian, and all documents submitted during the process must be in Russian.
In order to receive a certificate of conformity for foodstuffs, the applicant must apply to the proper accredited body. A list of several such bodies in Moscow is given in the Appendices. A complete list of accredited bodies can be found at Gosstandart or at the All-Russia Scientific Research Center of Certification, as well as at regional branches of Gosstandart (in Moscow this is Rostest-Moskva).
Along with the application, the applicant must provide the documentation needed to determine both the number of samples required for testing and the cost of the consignment of goods. This documentation includes the delivery contract, invoice, waybill, freight customs declaration, certificate of origin of the goods, hygiene and veterinary certificates, manufacturer's certificate of quality, certificate of safety issued by an independent party (in order for the goods to clear customs, a certificate of conformity can be received without testing, valid for three days; in order to receive a long-term certificate of conformity, samples of imported goods must be presented in the course of one week after their import into Russia). Among other things, food products are tested for content of radioactive elements, sanitariness and fermentation.
For systematic deliveries of analogous goods (i.e. regular imports of a particular product), the applicant may conclude a contract with the certification body to conduct inspections of this type of good for the duration of the certificate, for a maximum of three years. Inspection shall provide for the selection of samples from new consignments of goods (either from goods on sale or in storage) and their testing with the aim of ensuring the stability of properties determining the safety of the goods. The frequency of inspections shall depend on the product in question and mutual consent of the parties.
Expenses involved in the process of certification and accreditation are borne by the applicant. They are not prohibitive and are based on established practices. The cost of testing food products varies by product but, as of 1 October 1994, the average cost of testing one designation of goods was 100,000 rubles (approximately $30.00 at current exchange rates of roubles). In addition to the cost of testing, a fee of 0.1% of the cost of the consignment of goods (i.e. the quantity which the importer would like to be covered by the certificate) is paid by the applicant on the issue of the certificate.
Assuming that the product is deemed to conform, a document is issued which confirms that the product meets the necessary requirements to be sold in the Russian market. A sample form of the certificate of conformity is included in the Appendices. In order to facilitate the certification process, Gosstandart has authorized the Swiss firm SGS to issue certificates of conformity abroad. SGS has representation in many countries, including New York (SGS Testing Facilities), Berlin (DIN-GOST-TUV) and Singapore (GOST-Asia). Contact information is listed in the Appendices.
Hygiene Certificate
In accordance with joint Statute No. 2 of Gosstandart and the State Committee on Sanitary and Epidemiological Oversight of Russia (Goskomsanepidnadzor) entitled "On the Protection of Consumers' Rights" (dated 5 January 1993), the mandatory certificate of safety of a product subject to hygienic and sanitary norms set by Goskomsanepidemnadzor shall proceed only on the possession of a hygiene certificate issued by bodies of Goskomsanepidemnadzor. In view of the fact that all food products, unprocessed foods, food additives and preservatives fall under the aforementioned statute, the receipt of a hygiene certificate on import into the Russian Federation is mandatory for the goods indicated.
Basically, the hygiene certificate represents the permission of the State Sanitary and Epidemiological Oversight (State SES) to produce or import products in conformity with established hygienic norms.
Hygiene certificates are issued by various related organizations of the State SES at the stage of the drawing up of contracts for the purchase of products abroad. Goskomsanepidemnadzor issues certificates for children's foods, food additives, new (non-traditional) forms of unprocessed foods, as well as products purchased under the auspices of international agreements.
Republic, krai, oblast, the cities of Moscow and St. Petersburg and other local departments of Sanitation and Epidemic Control issue certificates on all other kinds of food products.
The SES is obligated to complete its examination within one month. For imported products, hygiene certificates are issued on the basis of an examination of the certificate of safety of the country of the supplier and/or the results of testing conducted in Russia. Thus, assuming a product is already approved for sale in the US, there should be no problems obtaining hygiene certification in Russia. When making application to the SES, the applicant must include samples of the product along with a US certificate of safety. There may be other documents required as regulations change, and it is recommended that interested American companies contact the SES directly. The cost of the process is nominal and varies from product to product. As of 1 October 1994, the average fee was 50,000 rubles (approximately $15.00 at current exchange rates).
Certificate of Origin
The certificate of origin is necessary in order to determine tariff and non-tariff measures for regulating the import and export of goods to and from Russia. The country of origin is considered to be that country in which the good was wholly produced or in which it underwent sufficient processing in accordance with established criteria.
For food products (processed and unprocessed) the following goods are considered to have been wholly produced in a given country:
(a) vegetable products grown or collected on its territory;
(b) livestock, born and raised in the country, and products produced in the country from livestock raised there;
(c) products produced in the country by the hunting, fishing, and sea products industries, as well as sea products harvested and/or produced in international waters either by vessels of the country or vessels rented by the country; and
(d) goods produced in the country exclusively from products indicated in (a) to (c).
The certificate of origin should unambiguously indicate that the given good was produced in the corresponding country, and should include a written declaration by the sender that the goods satisfy the corresponding quality of origin; and a written verification from the authorized body of the country of export issuing a certificate that the information presented in the certificate corresponds to reality. In the United States, certificates of origin are usually provided by local chambers of commerce and are easily provided by freight forwarders. In most cases a standard international form of this document is used (it is called "Form A"). Should an American company wish to prepare this document itself it will require the following information: country of origin, country of destination and country in which the contract was signed. Because goods are often not delivered directly from their country of production (in case of transshipment), documents must be appended to Form A affirming that the goods were delivered via in intermediate country and that customs clearance did not occur there.
Veterinary Certificate
All products of animal origin imported into the Russian Federation must receive a veterinary certificate. This certificate must be of a definite form, approved jointly by the Russian State Veterinary Service and the corresponding service of exporting countries. The international veterinary certificate must be exchanged for the corresponding Russian veterinary certificate (as stipulated by the Ministry of Agriculture of the Russian Federation). In addition, animal products which are imported for sale in Moscow must be certified by the Moscow City Veterinary Association. The process for receiving this certificate is as follows:
(a) On the conclusion of a contract (or another document defining the product to be imported, if a US company is shipping to its Russian office), the importing firm should conclude a parallel contract with the warehouse where it is intended that the products should be stored under the sanitary-hygienic and technical conditions obligatory for the preservation of the quality of the goods.
(b) The importing firm writes a letter addressed to the Chief Doctor of the City Veterinary Association with a request for permission to import. The letter should include the country of export, list of imported products and the contract number. To this should be attached the storage agreement, the contract, the veterinary registration certificate, and attestation of disinfection. The last of these documents is issued by a Animal Disease Control Station (Russian acronym SBVZh) after an inspection of the warehouse with which the importer has concluded a contract for storage. The warehouse company will be able to provide contact information for the appropriate SBVZh).
(c) Upon approval, the City Veterinary Association will contact the Department of Agricultural Veterinary Medicine and registers the permission there. The Department, in its turn, contacts the customs body for external customs and reports on the permission for the import of the products indicated in the letter.
It should be taken into account that the import of meat and all meat products from certain countries is regulated by document no. 19-8-02/2777 of the Department of Veterinary Medicine of the Ministry of Agriculture of 20 December 1993. In particular, the import of beef from Great Britain, of poultry from Germany, and the import of any kind of meat from African countries, India, Turkey , and Portugal is prohibited. Fresh pork from the U.S. must go directly into processing, and the importation of ground beef is forbidden.
IV. Customs Clearance and Related Fees
While it is easy enough to obtain the official rules for customs clearance into Russia, the customs process itself is fraught with difficulty. It is not uncommon to find that customs officials apply the rules differently to different importers, depending on the relationship which these importers have with the customs point in question. American exporters are advised not to attempt this process without the assistance or guidance of an experienced freight forwarder or Russian partner.
Officially, the passage of goods across the Russian customs border is regulated by the Temporary Statute on the Process of Passage and Declaration of Goods that Are the Object of Foreign Trade Purchase and Sale or Barter, (dated 1 September 1992) as well as Orders of the State Customs Committee No. 94 of 11 March 1994 on import customs duty rates, no. 388 of 1 August 1994 on excise rates, and No. 118 of 1 April 1994 on exemptions from VAT.
The process of passage of goods stipulates that goods, with the exception of those whose import into Russia is banned, are to be released into free circulation upon the presentation of the following documents by Russian enterprises and organizations:
(a) Goods-transport waybill - CMR.
(b) Account invoice (pro forma invoice, invoice), containing information on the quantity and value of the goods.
(c) Internal customs transit (ICT) or TIR (delivery of the shipment from external to internal customs proceeds by the ICT procedure).
(d) Certificate of origin of the goods - form A (for developing countries).
(e) Veterinary or quarantine certificate, if necessary.
(f) Certificate of safety or conformity.
(g) Freight customs declaration (CD).
(h) Declaration of customs value.
(i) Payment orders affirming the payment of customs duties specified by the legislation of the Russian Federation, customs processing fees, and, when applicable, other customs payments.
American companies are recommended to utilize the services of a freight forwarder with proven experience in Russia. In addition to preparing all necessary documents for shipment of the goods into Russia, many companies have Moscow offices which can handle internal customs clearance.
In addition, the following documents of the importing firm are necessary for the clearing of customs: The charter of the enterprise, certificate of registration of the enterprise, certificate of registration as a participant in foreign trade, attestation from the state Statistics Committee of receipt of a OKPO code (OKPO: General Classification of Enterprises and Organizations), purchase-sale contract, attestation from a bank on the opening of ruble and hard-currency accounts, for joint ventures - attestation of the registration of the enterprise in the register of enterprises with foreign investment, warrant of the right of customs processing of the goods, if applicable, warrant on the right to receive a shipment. Originals of these or notarized copies must be presented, as well as copies that are to remain with customs.
Customs processing of the goods begins after the notification of customs of the delivery of goods to places designated for customs processing, as well as the presentation of the CD and other documents indicated above.
There are also many trivial factors that influence the success of the clearing, and experience is necessary to acquaint oneself with them, but we shall address the main points are addressed below. Immediately after the shipment is sent, it is necessary to obtain from the sending firm a copy by fax of the invoice or pro forma invoice, as well as other information needed to fill out the CD. Below all the details needed in filling out the CD are given: name and postal address of the sender and receiver, as well as the fax number and OKPO code of the receiver; information on the bank managing the importer's account, and payment information of the importer; information on the means of transport used to ship the freight to the customs point and means of transport on which the goods are to be brought into the Russian Federation; terms of delivery; number and date of signing of the contract, indicating the type of currency used (for simplicity of calculation at customs it is best to indicate sums in the contract in US dollars or in rubles), the invoice value of the goods, calculated in prices c.i.f. or franco border of the Russian Federation in US dollars. Recalculation into US dollars is done at the Russian Federation Central Bank rate in effect at the moment the declaration is accepted for customs processing; type and amount of freight space and its marking, and gross and net weight of the goods; number of the transport documents; number and date of issue of all documents accompanying the goods.
The CD contains 54 graphs and is filled out by an authorized person for each consignment of goods. If there are several kinds of goods in one consignment, additional pages are used, each of which allows three more kinds of goods to be declared. In one declaration, information on up to 99 types of goods may be given (no more than 33 additional pages may be attached to any declaration).
In order to shorten the length of time required for customs clearing, the CD may be filled out in advance at the customs post at which the goods should arrive. It is extremely important that the importer be familiar ahead of time with the Schedule of Goods of Foreign Trade Activity (SG FTA) and that when filling out the CD he is able to classify the product being imported in such a way that the customs charges are a minimum. Naturally, one must remember that the importing firm bears responsibility for the information contained in the CD given for customs processing. The customs institution affirms the receipt of the CD by affixing a declaration number and the date the declaration was received for processing. The declaration remains in force for the receipt of goods for five banking days, in the course of which all payments must be effected and all necessary documents must be presented to the representative of the customs body. The originals of the payment orders, accompanied by a round bank seal, must be presented. If the deadline is not met, the CD must be reissued.
In order to reduce to length of time for customs clearing, it is possible to pay customs charges before the arrival of the goods. In so doing, there is a certain risk that for some reason the invoice value of the declared goods and that of those that actually arrive may not coincide. In this case, it is necessary to register the fact at the customs post and, depending on the result of the recalculation, either pay the required additional customs charges or leave the overpayment in one's account against future consignments. In addition to this, for customs processing, in accordance with the Law of the Russian Federation on "Protection of the Rights of Consumers" and the Orders of the State Customs Committee of the Russian Federation No. 612 (dated 12 December 1992) and No. 257 (dated 24 June 1993) it is necessary to have a certificate of conformity, as well as a hygiene certificate and, in certain cases, permission for the import of food products into Moscow, issued by the Department of Veterinary Medicine of the Ministry of Agriculture of Russia. A description of how to obtain these documents is given in the section "State Regulation of the Safety of Food Products" and, in order to receive these documents before the arrival of the goods, it is necessary to begin preparing everything necessary for them as far in advance as possible.
Customs clearing may of course be initiated after the arrival of the goods at the designated site of customs processing, but in this case the driver or forwarder of the freight must have in his possession the first five aforementioned documents, the manufacturer's certificate of quality, the certificate of safety issued by an independent body, as well as the goods being transported. The completion of customs processing is affirmed by the stamp "Release Permitted."
The length of time required for clearing customs, which depends strongly on the "promptness" of the importer, can vary between several hours and several days. Delays of a week or more are not uncommon, especially for new importers who are unfamiliar with the process and the personnel working at customs. Experience shows that customs clearing at customs posts in the suburban Moscow region proceeds significantly faster than that in Moscow itself.
If necessary, the importer may use the services of customs warehouses. Freight may be stored there free of customs duties and taxes for up to three years. Additionally, at free, so-called "consignment" warehouses, goods-owning companies may conduct manufacturing or commercial operations with goods, with the exception of retail sales, free from customs duties; the duties are paid by the new owner. The main customs warehouses in the Moscow region are "Molcom," "Moscow Cash & Carry Mozhaisk," "Steepler Terminal-7," "Tekhnotorgservice," "Ibris," and "Butovo." Besides these, there are about 200 other customs warehouses operating in the region.
In selecting a warehouse, the following factors should be considered: is there a customs station there; is the warehouse sufficiently well-guarded; does the warehouse offer a full range of services; and of course, does the warehouse provide the necessary storage conditions. Major import firms usually set up their own customs warehouses.
Importers are responsible for the information they provide in completing the CD and in the process of clearing customs, and may have the following sanctions imposed upon them for violations:
(a) Delay of shipment in case of: incorrect completion of the CD; failure to provide sufficient grounds for release through the border; failure to pay duties and fees; and other violations of the declarer's obligations. Violations of the declaration procedure can result in a fine of from one to five minimum monthly wages, as established by law (currently the monthly minimum wage is 20,500 rubles, or $6.60).
(b) Valid information not declared in the correct form, or false declarations without evidence of contraband are subject to a fine in an amount of 100% to 200% of the value of the goods and transport means, with or without confiscation; while transfer of goods and transport means across a border using false documentation or identification is subject to a fine of 100% to 300% of the value of the goods and transport means, with their confiscation or an additional penalty in the amount of the value of such goods and transport means.
(c) For contraband, refusal to pay customs charges in major amounts, as well as for conducting illegal currency operations, the violator shall be liable in accordance with Russian Federation criminal legislation.
Parties accused of violations of customs regulations may appeal the decisions of customs authorities as concern such violations.
In the process of customs clearing, the importer may encounter the following problem: goods which are ready to clear customs arrive on Friday evening or on non-working days (customs bodies normally take the weekends off, and on working days they close at 5:00PM). If the goods arrive on Friday, for a certain fee the customs body is entitled to release the goods "for safekeeping" with mandatory subsequent customs clearance. If the goods arrive on a non-working day, it is necessary to call out a customs inspector well in advance for work on a day off.
V. The System for the Distribution of Goods
Sources for Receiving Goods.
Information about the import structure and the primary country-suppliers of foodstuffs is given in the Appendices. Clearly the majority of imports are initiated by Western European countries, due to the following factors: cheap transport, due to the opportunity of using rail and motor transport as opposed to sea and air transport which are used for imports from the Americas, Australia and Africa; historical economic and political ties between Russia and many European countries as well as traditional markets for certain goods - European brand name recognition in Russia. At the same time, imports from Europe are complicated by bans in effect within the European Union (EU) against dealing in certain kinds of agricultural products with non-EU members.
Some Asian firms ship their goods via European firms to access European Russia. These firms process the raw material and supply the finished products to Russia. Far East imports are carried out independently.
Companies which were founded on the basis of former foreign trade associations use Eastern European channels for food supplies - Hungary, Bulgaria and Yugoslavia - for wine, fruits and poultry.
As a rule imports from the USA are made by major trading companies for their own retail chains of specialized stores.
Major Import Sources - Foreign Importers.
Major manufacturers like Master Foods, Coca-Cola, and PepsiCo have been successful in establishing broad market share. They target sales markets, organize distribution channels, have their own warehousing facilities, engage in retail operations as well and control all movement of their goods.
Imports of finished products from smaller European firms are usually carried out through associations which have representations set up in major cities. They organize insurance policies and transport which shields them from the vagaries of the Russian market and allows them to follow changes in market conditions due to seasonal use of certain goods.
Another widely used form of activity for Western firms is to conclude one- time contracts for shipments of specific goods. This form of relations is used primarily by major manufacturers which have a broad world sales market and for whose goods demand always exceeds supply. An example of this kind of firm is Nestle, whose products are well known in Russia.
Major Import Sources - Russian Importers.
Major Russian commercial trading companies exist which have established dealer or distributor relations over the past 3-4 years with foreign manufacturers. Examples include Olbi, Roditi, SoyuzContract, Hermes- Soyuz (has several divisions, such as Agroproduct), Soki Plus, and Erlan. These firms work on major contracts, add 7-10% trade mark-ups, advertise the products themselves and have tight control over the logistics of delivery. Frequently these companies will use old foreign advertising campaigns which are of superior quality to modern Russian advertising to move goods on the market which are not in high demand abroad (e.g. Hero, Goesser).
There are distributors who represent a single company in the Russian market; for example, Svetlana-Service distributes production of the ALCO firm (Hungary) which manufactures low alcohol beverages. This is the exception rather than the rule, however.
Medium and small wholesale commercial companies.
These companies work with several suppliers at once, often at random, and are not official distributors of the goods they sell. While major firms tend to buy only high quality goods, small and medium sized wholesale companies place more importance on low prices. Nothing is done to develop markets for the goods since they focus on goods in current demand.
Ties of Importers with Other Regions in Russia.
The Russian market may be divided into 5 major regions - the Central Blacksoil region, the Central region, the Urals, Siberia, the Far East and the Far North.
Major commercial organizations which import production from Europe and the USA are situated in major cities throughout the Central Region such as Moscow, St. Petersburg and Nizhny Novgorod, since these cities have more highly developed infrastructures connected with the placement of various goods on the consumer market (advertising, transport, warehouses, developed retail networks, etc.). The same can be found in major cities of the Far East, except that imports basically come from the Pacific-Asian region.
These organizations maintain relations only with major industrial centers of the other regions. In European Russia these are Stavropol, Krasnodar and Belgorod, in the Urals - Yekaterinburg, and in Siberia - Novosibirsk, Krasnoyarsk, Tyumen.
This is connected with the specifics of economic development for each region. The Urals, Siberia and various regions in the North act as fuel and raw material bases for the country. Distribution of their production and supplies of necessary foodstuffs to them continue to be provided by state trade organizations and organizations which are part of the consumer society system; moreover, supplies by state organizations come from major regional centers and consumer societies organize shipments of goods to remote regions.
Shipments of commercial goods to these regions are expensive and difficult since these regions lack a developed infrastructure and the commercial trade network is only just getting underway. As a rule goods are supplied to these regions on a small scale wholesale basis through private trading firms provided that they bring the goods from regional centers themselves. The average volume of transactions is about 10-15 million rubles.
Because of the aforementioned difficulties, some firms have begun to manufacture goods in-country. For example, Coca-Cola is building a soft drinks bottling plant in Yekaterinburg. Negotiations are underway to build a plant in Stavropol for production of ALCO goods and to build a Pepsi bottling plant in Krasnoyarsk.
Relations with CIS countries are complicated by interrupted political and trade ties, poorly developed commercial activity in most of the countries, settlements in local currencies, poorly developed banks and political instability. This frequently results in trade being carried out with these countries through third countries and by barter.
Wholesale Trade.
Wholesale trade of foodstuffs in Russia is made up of purchases from Russian regions (cereals from the Blacksoil region, milk and meat products from the Central region, finished production from the Urals and Siberia, fish and other sea products from the Far East and Far North) and food imports from abroad. In the Soviet Union wholesale trade consisted of a network of wholesale depots and enterprises which were part of the state system, and the Rospotrebsoyuz system, which is the consumer society system. These two trade monopolists regulated the entire system of supplies to remote regions, i.e. the majority of the domestic market, including supplies of foreign goods. The activization of commercial activity became possible in 1991 after prices were "freed," opening the door to foreign exporters. After a period of chaotic trading enough commercial organizations capable of conducting trading activities were organized over the next three years in major cities in European Russia, especially in Moscow and St. Petersburg.
Moscow is the largest center of wholesale trade in Russia. The highest income levels in the population can be found here and the higher prices of the Moscow market and strong demand attract commodity resources to Moscow in large volumes..
It should be noted that food markets have already formed in major centers and the large scale wholesale organizations have established relations with a network of small and medium scale wholesale firms or retail chains. For the most part, individual firms make large scale wholesale purchases from local manufacturers.
When speaking about the development trends of the wholesale market, special emphasis should be placed on the primary trend: "reduction in the role of government structures and the Russian consumer society system and an increase in the share of commercial organizations in supplying foodstuffs to the population."
The reduction of the role of state organizations in forming the wholesale market is obvious, since joint stock companies which operate independently in the Russian market are being formed from those organizations. In addition to this, private firms are growing and forming trade and industrial syndicates (e.g. Erlan) or corporations which are being created have manufacturing, finance, trade and other divisions (e.g. Hermes). In the near future we can expect to see even more growth from wholesalers and the emergence of 3-4 major players for each goods group. Major wholesalers are forming firm relations with medium scale wholesalers, which in turn are forming relations with small scale wholesalers; moreover, conditions for work among them will be made more flexible as confidence in the system grows (wholesale discounts, payment terms, contract terms etc.).
Locate to the various regions while competition will arise in the cities among firms selling specific goods. This might result in a reduction of the dollar price for these goods, although in the Moscow yogurt market, for example, wholesale firms have united and "agreed" to hold prices at a specific level (Eksimer, SAM and M-Ross hold 80% of the market which totals 1.5-2 mln USD). The government does not protect local manufacturers. Because of this we can expect a dramatic rise in imports, especially due to relations being formed between CIS countries as well as from these countries. The wholesale market will be controlled by importer firms and furthermore, the share of private firms in the wholesale market will increase. Once conditions are formed for the development of farming and agricultural production (private capital investments will intensify), the wholesale market for basic foodstuffs will change and be basically constituted by goods which are either difficult or impossible to produce in Russia (delicatessen, fruits, many alcoholic beverages). This, of course, will be a long-term development.
We are already witnessing a tendency for Russian manufacturers to set up production (where possible) of goods currently being imported from developed countries. An example of this is the Lianosovsky plant which has begun production of yogurt and chocolate milk. Major western manufacturers such as Coca-Cola and Danone have started investing in production. Many western firms form joint ventures for sales of technology and semi-finished products for further processing or carry out such activities through their representation (e.g. Berlin-Consult).
Retail Trade.
Retail trade is still in a relatively early stage of its development, and there is no such thing as the "super store" which has become so widespread in the US. Even the largest stores in Moscow are small by American standards. In Moscow, this retail trade is realized through a number of channels:
stores
warehouse stores which engage in small wholesale business
public catering sites (cafes, restaurants, cafeterias and mobile
stores)
kiosks
mobile stores
open markets
All the above may be privately owned (limited liability company - LLC or joint stock company - JSC), or state
owned. In Moscow they tend to be LLPs and JSCs which are under the supervision of municipal divisions of the
consumer market and trade and finance inspectorates. The city market chain is well developed in Moscow and many
wealthier people prefer to buy all their basic foods here.
Stores and warehouse stores may be extremely specialized (e.g. focusing on sales of canned or frozen foods), may sell daily demand foods or may be grocery stores which sell all basic foodstuffs. Their suppliers can be small and medium scale wholesalers and sometimes the manufacturers themselves. If stores are part of a chain belonging to a group of large scale wholesalers then of course those wholesalers are their suppliers. Stores such as Stockmann (Finland) and Global USA (US) which are part of a retail chain have begun to appear in major cities in the last few years and are gaining in popularity among the wealthier locals.
Due to an extreme shortage of commercial real estate space, kiosks and mobile stores are typical of the Moscow retail network. These are free standing structures, usually 8 x 12 feet or so.. They usually have windows in the front which display goods, and business is conducted through a small window in the front. They may be specialized or part of a specific manufacturers retail chain, such as the Mikos kiosks which sell meat and dairy products from the Cherkizovo Meat and Dairy Plant, or nonspecialized. The latter purchase their products at small wholesale depots, usually for cash. The attempts of the municipal authorities to protect the consumer and supervise the cash turnover at kiosks by requiring them to use cash registers have not succeeded fully since the kiosk sellers do not always register sales. Kiosks tend to have better locations and more flexible opening hours than proper stores, but the trend to open kiosks is dying off since the only reason to open them in the first place is in order to amass capital and then expand the kiosk into a pavilion, and from there into a specialized private store. Still, their hold on new residential districts in the city is great, as it is in other Russian regions which continue to lag 2-3 years behind city centers. It should be noted that the present Moscow government has come out against kiosks, and many of them have been closed down. It is difficult to provide a brief description of the public catering system. Most importantly, this system is well developed in Moscow and according to experts about 10% of the total monetary volume of retail food trade is channeled through this system, which consists of the following: 1. A developed network of cafeterias at scientific research centers, design, academic and ormer state institutions. The majority of state employees and students, at least 1.5 million persons, eat at such cafeterias every day. A lunch costs about 2,500 rbl, or approximately USD.80.
2. A widespread network of kiosks, mobile stores, cafes and so forth which sell fast foods. These tend to be located near train stations, flea markets and large downtown stores and serve the large numbers of visitors to Moscow.
3. Fast food restaurants such as McDonald's, Pizza Hut, Burger Queen and Kombi's, which have an established clientele and are constantly busy.
4. Restaurants and bars whose level of service and cuisine is targeted at the wealthier sector.
The Role of Cash
Cash plays a definite role in all trade and intermediary activities in Moscow since almost all firms in retail purchase their goods for cash. It is extremely difficult to supervise retail trade and the Moscow tax police lack the experience to handle this problem. Non- cash payments for trade is encountered only with partners from other regions.
The Mechanism for Price Formation
The following factors are taken into account both in retail and wholesale trade when forming prices:
1. The price of the goods being supplied under the contract, including insurance, transport and storage expenses;
2. The amount of VAT and special taxes, excise duties; if the goods are imported, then customs duties and other customs fees taken from the trade turnover;
3. Built-in profit which takes into account taxes (small scale wholesale stores usually operate with a 15% profit after payment of profits tax, retail stores build in 20-30% profit);
4. Changes in the exchange rate for the dollar on days when customer settlements are made;
5. The influence of competitors.
The table below gives several examples of price calculations set for foodstuffs imported from France by a Moscow firm for sale at its retail stores.
Table A No. No. of Unit of Goods Customs Base Adjusted Sales units measure Duty Price $ Price $ Price $ 1 112 package Water Contrex Pack 10 3.24 4.28 6.10 6x150c1 2 90 crate 24x135 GR Thon 15 15.22 20.39 25.20 Sauce Aromates Soup 3 56 crate Bixcuit Biscamour 15 12.26 16.43 20.90 11x500 GR This shipment was delivered as part of a shipment of other foodstuffs by a 20 ton truck. The adjusted price was calculated on the basis of the freight costs (17.57% of the invoice price), insurance (0.9%), customs duties and customs registration (0.47% +10 or 15%). The sales price was calculated on the basis of this, the demand for a specific good and an adjustment for profits tax.
Principles of Taxation
1. Enterprises engaged in trade and purchasing activities shall pay VAT and a special tax which are to be calculated from the trade markup (20% and 3%, respectively, and 10% for some goods)
2. 0.06% tax on road use shall be paid from goods turnover
3. Profits will be subjected to the following taxes:
profits tax - 38% estate tax - up to 2%, in Moscow the rate of 1.5% has been set for fixed assets and some other balance sheet assets items tax on excess labor payment funds (the upper limit for non-taxable labor funds is the number of employees multiplied by 6 times the minimum wage) at a rate of 38% of the excess funds a tax for the needs of educational establishments - 1% from the labor payment fund tax on maintenance of the housing fund - 1.5% of the goods turnover.
Profit shall be defined as the difference between the income of an enterprise after trade and intermediary activities over a balance sheet term and the expenses of an enterprise made during this term, including salary payments to employees, expenses on equipment purchases and so forth.
4. The following shall be paid from the salary fund:
pension fund contributions - 28%
employment fund contributions - 2%
compulsory medical insurance - 3.6%
social security contributions - 5.4%
transportation tax - 1%
5. Private individuals shall pay 13% of their salary to taxes, of which 1% goes to the pension fund
and 12% covers income tax. It should be noted that enterprises may not set trade markups greater
than 25% of the cost of the goods.
VI. Profiles of Russian Customers
Due to the extreme differences in wage levels for inhabitants of various regions it is impossible to present a single portrait of the Russian consumer. The disparity in wages by region is dictated by two factors: the extreme imbalance of industrial sector distribution throughout the country and the profound economic crisis which is being experienced in almost all industrial sectors except for the oil and gas extraction and refining industries. In other words, the only regions where the wages are fairly high are those connected with the extraction and processing of energy resources. This is illustrated by the two tables below:
Table A. Average Regional Wages (rubles) in Russia on 6/1/94
Chukotka autonomous district 757,000
Tyumen Province 481,000
Kemerovo Province 360,000
Krasnoyarsk Territory 274,000
Moscow Region162,000
Ivanovo Province 112,000
Bryansk Province 107,000
Orlovsk Province 106,000
Moscow 231,000
Table B. Average Wages by Sector (Exclusive of Additional Undeclared Income)
For national economy overall 183,500
Gas 1,000,000
Light Industry100,000
Agriculture75,000
Healthcare 144,200
Public Education 139,900
Culture, Art (exclusive of prizes) 120,900
Science (exclusive of prizes) 140,900
Insurance and loans 334,600
Administration 241,000
It should be noted that urban populations tend to have higher than average salaries since business activities are
concentrated in urban centers and administration and commercial structures are highly developed.
Diagram 1 Population Distribution of Russia by Income (First half of 1994, @ 1 rbl=USD 1600)
The number of destitute persons decreased by 0.5% and the number of poor persons decreased by 2% compared to 1993 figures. The average group increased by 3.3-6.5%. The number of wealthy persons decreased by 4 -5%.
The following main population groups may be defined on the basis of Tables A and B:
(a) Smallest income group (approximately 60% of the population) -- mostly employees in agriculture and the least profitable industrial sectors, as well as most employees at state enterprises. Concentrated primarily in central Russia and the Urals. The food ration for this group is fairly poor and consists of the cheapest goods. Farmers receive only those foods which they cannot produce themselves - bread, vegetable oil. sugar and tea.
(b) Highest income group among blue collar professions (6% of the population) -- employees at developed industries - "Gazprom", "Rosneft". Concentrated in various regions of the Far North and Siberia. Receive all necessary foodstuffs through stores which are organized by the management of the companies where they work. Possess tangible benefits when buying goods since stores often sell goods received as payment for energy resources.
(c) Average income group (29% of the population) -- employees at some state bodies and commercial structures. Primarily these are inhabitants of major urban centers. The example for consumers in this group is based on Moscow data.
A separate group may be created for wealthy Russians. They are a small group (about 5%) and according to data from the Russian Institute of Applied Politics the wealthiest of them (less than 1 %) prefer Moscow to any other part of Russia, although only a little more than half of that number are native Muscovites. Their average age is 36, 70% have higher educations and 72% are married. More than 3/4 of all super wealthy persons come from the so-called intelligentsia. Millionaire bureaucrats, i.e. those who started their careers in the Communist Central Party or the KGB account for 12% of the Moscow wealthy. According to the Moscow wealthy, 75% made their money in trading, 23% in consumer goods manufacture, 20% in banking activities, 18% in market activities and 15% in publishing.
People in this group do not have any problems in finding goods, and place quality as their main criterion when buying. Most wealthy people in Moscow tend to purchase their food in supermarkets where the prices for goods are several times higher than for the same goods in other city stores and about 20% higher than prices for these goods in other countries. These people prefer stores with good service, certain name brands of goods and a recognition value abroad.
The wealthy are the only people to visit entertainment spots, discotheques, fancy restaurants and casinos. Although there are 70 casinos in Moscow, the gambling business is still in its first stages here and only 10 casinos are of an acceptable standard. Clients gamble for entertainment, not for profit.
The Typical Moscow Consumer
Market studies conducted by JV Rivita Marketing at ordinary Moscow stores showed that women are the main consumers. Their social status was defined after a poll of 1000 women (See Diagram 2).
The average consumers are women aged 35-40 with a job, a family of 3-4 persons, and with school aged children. The women who participated in the poll categorized themselves as having "average incomes" (about 30%) which means they must economize on everything, including food.
Representatives of the high income groups do not set the demand for goods, including foodstuffs.