Date Submitted: 07/15/95
This report was prepared by the Office of Agricultural Affairs of the USDA/Foreign Agricultural Service in Moscow, Russia and is in the public domain. It may be reprinted without permission. Use of commercial or trade names does not imply approval nor constitute endorsement by USDA or FAS.
General Summary
Russia has quickly become one of the world's largest consumer-ready food importers, and, with a population of nearly 150 million and a rich resource base, its future potential far outstrips many other emerging markets. The Russian Federation's economy continued to stabilize over the last 12 months. Inflation has fallen and continues to fall, registering only 7 percent in June. The Government's recent pledge to support the ruble within new exchange rate bands should create more confidence in the economy, dependability in currency exchange and in turn, support for international trade. Relative economic stability should also translate into further development of retail and wholesale food markets and an expansion of consumer ready food imports.
Russia's enormous demand for products has acted as a magnet for trade. 1994 Russian Customs data shows that $10.6 billion in agricultural imports was declared and duties paid at border customs clearance posts; however, it is widely thought that this figure greatly underestimates trade due to smuggling and re-exports (e.g. from Finland and Dubai). In the first 6 months of 1995, Russia ranked as the number four U.S. market for consumer-oriented products, an achievement which has been reached despite measured market development activities by U.S. exporters. The largest share of consumer-ready food imports has been supplied by Europe, whose exporters enjoy close geographic proximity and have had Government support for achieving wide market penetration within Russia. Moscow and St. Petersburg are among the largest cities in Europe, they possess reasonably modern infrastructure and thus act as natural centers for distribution to other parts of the country. Other major cities are beginning to look for direct imports to avoid the product markups in Moscow.
Countering positive developments in the market is a negative attitude towards imported products which has recently been promoted by Government officials anxious to win favor with rural voters and protect what remains of Russia's failing domestic processing industry. Higher tariffs, new regulations, and editorials against imports which publicize quality problems, are evident in Russia today. Despite these difficulties, imported food products continue to be consumed by a large percentage of the population, particularly in the major cities.
Despite sometimes alarming economic developments such as Black Tuesday, when the ruble lost one-third of its value in one day, Russia seems on the right track to achieving financial stability and this year received an IMF stabilization loan and World Bank funds. There is clear demand for imported products and ready opportunities for U.S. exporters.
U.S. MARKET POSITION
In 1994, the U.S. provided over 30 percent of Russia's total meat and poultry imports and 10 percent of confectionary and candy exports. These percentages may sound small, but market size for these products was so huge that these two areas accounted for $400 million in sales. Consumer ready food products represented a $7.5 billion market for all countries, accounting for almost 75 percent of Russia's total agricultural imports of USD $10.6 billion.
A wide range of U.S. products can be marketed in the Russian Federation. Already, products such as chicken leg quarters, California varietal wines, beer, snack foods, and frozen foods are available. Growth potential is seen for products which Russia imports in great quantities, but for which there has been little active interest from U.S. suppliers. These include juices (orange and apple are the most popular), nuts, canned and fresh fruits and vegetables, pasta and products, candy and confectionary products, beverages, wine and beer, cheese, and pet food.
Russians, in general believe that U.S. product is characterized by high quality. Although the U.S. trade numbers cited above are positive, they do not indicate what the U.S. position could be with a greater effort by U.S. exporters to promote their products.
Processed foods with expiration dates can be successfully shipped to Russia, as long as an importer is educated about shelf life and has enough time to market the product. Among factors which consumers name as one of the most undesirable are imported foods with expired labels. Expired shelf life is also an issue raised by Government officials when they criticize Russia's dependence on imports.
Advertising can be readily purchased, given the proliferation of trade journals which target retailers. In-store promotion is popular in Moscow and St. Petersburg, but is becoming more complicated and expensive. In St. Petersburg the first tasting was conducted by a Finnish firm three years ago and now more than 30 tastings are reportedly happening on any given day across town.
DOMESTIC AND THIRD-COUNTRY COMPETITION
The high cost of credit has been the leading factor influencing Russian importers to source product from Europe rather than from the United States. Under conditions of high inflation, the cost of tying up money for the longer delivery time discouraged imports from the U.S. European food exporters have been quick to take advantage of this and have cultivated Russian business and formed many joint ventures. These exporters have now reached a stage of business trust with many importers and are willing to sell goods to the buyer on supplier credit. European exporters are also selling more and more goods on consignment.
Retail supermarket chains which represent Europe's largest suppliers of consumer-ready
products have opened grocery stores and supply networks in major Russian cities.
These stores are stocked by mixed containers, and have a selection sometimes
of 4,000-6,000 items. Prices for these products are high, but customers are
available. Some sources speculate that the ability of Europe
to respond to increased demand is
limited. The U.S.'s European competitors have benefited from government assistance
through export programs and business-support activities. The European Union
has established a network of subsidized-business partnership centers through
its Technical Assistance for the Commonwealth of Independent States (TACIS)
program. Funds are disbursed to support formation of joint ventures which
promote business contacts. These centers are open in over 30 Russian cities
which results in much greater market penetration than is achieved by U.S.
exporters through U.S. Government programs. This form of support is extremely
well suited to Russia as its economic landscape is littered with entrepreneurs
who lack only a small amount of capital and business know-how to start up
companies that could begin importing. European Union (EU) members also recently
announced formation of a new group, the European Business Club, which unites
private businesses from the EU to lobby Government on financial and access
problems with the Russian market. For U.S. businesses, Moscow has an American
Chamber of Commerce which also addresses finance and access issues.
Domestically produced goods often are characterized by low-quality, and generally poor packaging. Because of inefficiencies in domestic processing facilities, the cost of final goods are sometimes higher than the comparable imported product. Goods from Eastern Europe are competing for often preferred by the many who cannot afford a higher priced Western Europe or U.S. product.
Table 1. RUSSIA: CONSUMER READY FOOD IMPORTS, CY 1994.
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Value
Total U.S. Percent Largest
(Millions of USD) U.S. Exporter
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MEAT & POULTRY 1,148 359 31.3 UNITED STATES
NUTS & FRUITS 1,098 13 1.2 ECUADOR/GREECE
EDIBLE GROCERY ITEMS 665 14 2.2 N/A
CANNED FRUITS/VEGS 652 16 2.5 HUNGARY
BEVERAGES, WINE, BEER 634 8 1.3 N/A
PROCESSED MEATS 586 10 1.8 DENMARK
DAIRY & EGGS 502 32 6.5 GERMANY
CANDY, CONFECTIONARY
PRODUCTS, SNACK FOODS 416 41 9.8 UKRAINE
FRESH VEGETABLES 340 4 1.2 NETHERLANDS
PASTA AND PRODUCTS 339 7 2.1 GERMANY
CEREALS 16 1.5 9.4 KAZAKHSTAN
PET FOOD 15 0.3 2.2 GERMANY
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SUBTOTAL 6,413 509 7.9
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NURSERY PRODUCTS
& CUT FLOWERS 15 30 0.2 NETHERLANDS
COFFEE, TEA 383 N/A N/A BRAZIL(COFFEE), INDIA (TEA)
COCOA PRODUCTS 711 N/A N/A GERMANY
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SUBTOTAL 1,110 30 0.0
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TOTAL 7,523 509 6.8
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SOURCE: Russian State Customs Statistics, and U.S. Bureau of Census. Russian Customs statistics are sometimes unreliable, and often understate actual trade.
Table 2. RUSSIA: TOTAL AGRICULTURAL IMPORTS, CY 1994.
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Value
Total U.S. Percent
(Millions of USD) U.S.
------------------------------------------------------------
CONSUMER READY FOODS 7,523 509 6.8
INTERMEDIATE AGRICULTURAL PRODUCTS 1,346 73 5.4
BULK AGRICULTURAL PRODUCTS 1,375 78 5.7
FISH, SEAFOOD AND PRODUCTS 246 2.5 1.0
FOREST PRODUCTS 88 1.4 1.7
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GRAND TOTAL 10,579 664 6.3
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SOURCE: Russian State Customs Statistics, and U.S. Bureau of Census. Russian Customs statistics are sometimes unreliable, and often understate actual trade.
DISTRIBUTION OF CONSUMER READY FOOD PRODUCTS
In several of Russia's largest cities, such as Moscow and St. Petersburg,
wholesale markets for consumer ready goods have developed. These markets are
comprised of private importers with a large warehouse network, sometimes with
a combination of large facilities in Europe and smaller facilities in Russia.
Several Moscow companies that one year ago imported food have switched to
other products. Some reasons cited by company representatives for departing
the marketplace are
new, higher tariffs and food safety certification problems. In general, the
number of importers continues to rise, but more slowly than one year ago.
Some companies, in order to enjoy the growth experienced when the Moscow market
was opening, have turned their attention to other areas. Some of Moscow's biggest wholesalers and retailers
now supply much of European Russia, but often with less variety, lower quality,
cheaper goods. Increased competition to supply Moscow's retail stores has
meant that these large importers vie for market share on what has become a
more stable Moscow market.
Also, more cash and carry stores have appeared where warehoused goods are purchased by small retailers such as kiosk operators.
MOSCOW - Much has been written about the Moscow market already. Moscow is the largest center of wholesale trade, and the highest income levels can be found here. Some reports indicate that 60 percent of Moscow's food is imported, and therefore, importing companies dominate the food supply picture. Moscow, as the most developed wholesale point, acts as a springboard for product access to other Russian regions, even though the Russian regions themselves have communicated to post that they prefer to arrange direct trade with exporters to save themselves the "Moscow Markup". Domestic supplies of food arrive at fruit and vegetable markets or through Moscow City Government acquisitions for the poor and pensioners. Moscow's retail store openings have slowed down recently, as the market shakes out from previous rapid growth. Moscow City is well-supplied with products, and competition is developing, noticeable due to the proliferation of advertising on TV, magazines, bill- boards, and the increased frequency of tastings offered daily at Moscow's supermarkets.
ST. PETERSBURG - St. Petersburg considers itself the most European of Russia's cities. St. Petersburg has a population of 3.3 million. In 1995, the city has over 2,700 food stores, up from 2,200 stores in 1994. According to a recent report, Of these stores: 2368 stores stock sweets; 2,214, general packaged/prepared food; 2,160, juices; 1,928, meat and meat products; 1,932, milk and milk products; 1,816, fruits and vegetables; 1,719, alcohol, 1,581, fish and seafood, 1,078, tobacco; and 1,047 bread and bakery products. Of these stores only 12 percent are State-run, 17 percent act as distributors, 58 percent purchase for retail themselves, and the remainder are some mix of the two. St. Petersburg also has a developed network of restaurants and cafeterias, and several companies have been established to distribute products to them.
URALS - The Urals is Russia's resource rich, industrial base. It is a major contributor to the Federal budget, and a major food importer. There is significant potential for U.S. products, but European competitors have a strong presence there already. The Ural Region occupies an area as large as Western Europe, and has a population of 40 million. Yekaterinburg is the largest city, with 2.2 million inhabitants. With natural mineral resources and industrial production, but little farming, the region is a net food importer. Distribution systems are not as developed. Most stores rely on supply from Moscow. Store owners and suppliers located in the Urals wish to import directly to avoid Moscow markups.
THE RUSSIAN FAR EAST - The Russian Far East (RFE) has 8 million residents
and the two largest cites are Vladivostok and Khabarovsk with populations
of 730,000 and 612,000 residents, respectively. The RFE is
unable to produce enough food to feed its population. The RFE is a natural
extension of the Pacific Rim. 85 percent of food products are imported, some
of which are U.S. origin. Vladivostok has a wide variety of imported goods
available from Canada, Australia, New Zealand, South Korea, the United States,
and China. A system of wholesale distribution is developing slowly, which
should get a big boost when a Russian-American joint venture cash and carry,
GIANT opens near Vladivostok in September.
DOMESTIC FOOD PROCESSING INDUSTRY
The domestic food processing industry is in great need of renovation. It has been unable to produce the quantity and types of food necessary to meet demand. Government resources are insufficient to finance this refurbishment, and foreign investment in this area has been inadequate. It is becoming more difficult to find Russian goods on shelves. Some demand is developing for production inputs. A new Masterfoods/Mars financed candy factory will open near Moscow in September, showing that foreign investors recognize Russia's market potential.
Factory managers complain that the government does not protect the domestic manufacturer. Over the last four years basic food production has fallen measurably. By some estimates, Russia's domestic production and processing is no better off now than 30 years ago. The production of meat processing plants, milk factories and all-other processing facilities has fallen by 40 percent. According to one estimate from the Russian Ministry of Agriculture and Food, only 16 percent of factories remaining can produce goods that would fulfill all hygiene and quality standards required by Russian law. To support a minimum of domestic processing, Russia is forced to import sugar, vegetable oil, butter and other inputs, as they are not available locally.
Government officials have been trying to promote domestic production and processing. These efforts include: adopting resolutions requiring that Moscow procure a specific proportion of food domestically, establishing a Federal Food Corporation to act as a market wholesaler, raising tariffs, and exempting some processing industries from Federal taxes.
TARIFF CHANGES
In accordance with resolution No. 454 of the Russian Government "About Acceptance of Rates of Import Custom Duties", adopted May 6, 1995, the Russian Federation raised overall tariffs on imported food products on average by 5 percent, and some tariffs increased as much as 20-25 percent. In addition to new tariffs, Russia established a value-added tax or VAT of 10 percent, plus another 1.5 percent presidential tax. Prices are forecast to rise nearly 20 percent due to this action. Already, Moscow City Government, sensitive to the drop in volume of trade for its private businessmen and tired of complaints from businessmen who already see 85 percent of profit siphoned off by tax authorities, has complained about tariff hikes. Moscow City Government is also concerned that the new, decentralized marketplace may mean that Russia will not be able to provide adequate and timely food shipments to the city. Large amounts of food were stockpiled prior to July 1, and prices have not yet risen sharply.
CERTIFICATION REQUIREMENTS
Food and beverage imports must meet Russian health and safety standards. Food safety standards have contributed to confusion and have in some cases, slowed new trade to Russia. The paperwork and lack of clear cut information connected to Russian food safety standards is frequently a source of frustration for traders. Russian concern with food safety is not without foundation. Some imported goods have been inferior in quality since the collapse of the Soviet Union precipitated the import boom in processed products. The Russian Government claims that up to 50 percent of imported food last year was poor quality based on Russian standards. Food safety standards are sometimes arcane and most were formulated under Soviet authority with a sometimes dubious scientific basis.
According to Russian law, all foods and beverages which are imported into the Russian Federation must be accompanied by a Certificate of Conformity issued by a laboratory accredited by the Russian State Committee on Standardization, Metrology, and Certification (GOSSTANDART). This certificate is issued after samples of these products are tested in selected laboratories, and test results indicate that they conform to Russian food safety standards.
Also a certificate of hygiene is required from the Russian State Committee on Sanitary and Epidemiological Surveillance, (GOSKOMSANEPIDNADZOR). Product must be tested in order that the exporter be eligible for the certificate. The level at which GOSKOMSANEPIDNADZOR's authority diverges from GOSSTANDART is sometimes unclear, but importers should establish and maintain contact with this group to ensure that import of their product is allowed.
Labeling requirements exist in law, but are rarely enforced. Label requirements are supposed to be monitored by GOSSTANDART, and it is advisable to contact this entity to make sure of regulations before exporting. Cyrillic-labeled food is appearing more and more, when even 9 months ago it was infrequently seen. It is crucial to label in Russian language any instructions on prepared foods.
With questions about food import certificates please contact:
Roy Barrett
Office of Food Safety and Technical Services Foreign Agricultural Service/USDA
SOAGBLDG, Room
TEL: (202) 720-7054
FAX: (202) 690-0677
LEGAL, PAYMENT, AND TRANSPORT ISSUES
The Russian legal environment sometimes is confusing -- due to the rapid pace
at which Russia's parliament adopts new laws and the presence of many import
and certificate regulations left over from Communist bureaucracy. One complaint
from exporters is that Russian law is overly beneficial to the consignee,
because title is very difficult to exchange where ownership is as
loosely regulated as in Russia. Thus,
consignment is complicated because there is not yet a body of law which will
allow goods to be released based on title transfer. This makes a system of
warehouse receipts very difficult to maintain and to use as a basis for traded
goods. Also, there is no specific law that has been passed to define the rights
of a supplier in distributor relationships. To settle disputes, most parties
agree to legally binding arbitration in Sweden, or elsewhere outside Russia,
but before one can arbitrate a case overseas a Russian court ruling is required
to determine whether a dispute actually exists.
The tough legal environment also makes it difficult to work within the framework of Russia's financial system. To avoid accounting mistakes which are sometimes impossible to solve, banks take several days to pay on order or even to move money to different accounts in the same bank. Many importers are reluctant to use cash, and settle accounts with offshore banks. Many transactions are prepaid by the importer, but supplier credit on a portion of the credit is preferred. The high cost of credit is passed on to the consumer because some importers markup goods another 25 percent not only for a profit margin, but to reflect the time money was tied up in an import transaction.
When investigating transport for goods there are several port options. Some U.S. exporters have expressed satisfaction with transport arrangements which include transhipment through Finland. This alternative means using Finnish contacts to avoid direct interaction with Russian officials and procedures at the product introduction stage. Russia and Finland share the same rail gauge. Rail shipments are sent in 5 wagon sections, with container doors pushed next to each other which limits pilfering. In Russia, there is no real system for returning containers, so transactions are often structured for a delivered container to be loaded and returned, or reloaded from arriving container into a Russian container. Some estimates conclude that two thirds of trade between Russia and the West travels through Finland.
To access European Russia, another option is St. Petersburg. This port city on the Baltic Sea has terminal container operations run by several Western companies. These groups promote their services based on an expectation that landing immediately in Russia saves money and time.
It should be noted that USDA's Foreign Agricultural Service (FAS), commissioned a study of container access to Northwestern Russia, examining alternatives for off loading in Finland, Latvia, Lithuania, and St. Petersburg, Russia. The study focused on transport and distribution options for the small and medium sized U.S. food processor. Results from this study will be available from USDA/FAS shortly and could be a valuable tool to determine answers to questions about how to begin to take advantage of trade opportunities with Russia.
STATISTICS
AGRICULTURAL IMPORTS (MILLION USD) 1/ 10,578
AGRICULTURAL IMPORTS AS A PERCENT OF TOTAL IMPORTS 27%
US MARKET SHARE OF AGRICULTURAL IMPORTS 6.3%
CONSUMER READY FOOD PRODUCT IMPORTS (MILLION USD) 7,523
AGRICULTURAL TRADE BALANCE WITH U.S. (MILLION USD) -469
MAJOR METROPOLITAN AREAS (NUMBER) 170
TOTAL POPULATION (MILLIONS) 149
POPULATION GROWTH RATE - .02%
URBAN POPULATION (MILLIONS) 109
URBAN POPULATION GROWTH .12%
FEMALE POPULATION EMPLOYED 70%
PER CAPITA GROSS DOMESTIC PRODUCT (U.S. DOLLARS) 2,332
PER CAPITA FOOD EXPENDITURES (U.S. DOLLARS) N/A