The competition on the russian alcohol market has become so fierce that some local vodka distillers leaked a report to the press alleging that drinking a Ukrainian peppered vodka makes men impotent.
The provocative move against a successful rival from Ukraine hit the target, and in the next two months after the alarming publication the sales of the vodka fell 10% and 20% respectively.
I am not aware if the information about vodka causing impotence reached Gennady onishchenko, head of the russian federal service for the oversight of consumer rights and welfare. last spring, his service banned the import of moldovan and Georgian wines and cognacs to russia. And on friday, october 13, an unlucky day for Ukrainian exporters of wine and vodka to russia, mr onishchenko announced that he would launch a probe into Ukrainian alcohol for compliance with russian sanitary and epidemiological standards. The official’s concern follows the recent crisis in the russian alcohol market, as the sales of illegal surrogate alcohol, including from Ukraine, left “whole towns intoxicated,” said mikhail vyshegorodtsev, a moscow government minister.
Mr onishchenko’s department first of all intends to check the origins and quality of raw materials for the production of alcohol and the quality of water for distillation. The very first inspections resulted in a ban on the import of Ukrainian wine. now it is Ukrainian vodka’s turn. The russian press has repeatedly said that Ukrainian distillers often use poor water, which has always provoked protests and assurances that Ukrainian vodkas are excellent.
Judging from the fact that Ukrainian alcohol accounts for about 10% of the russian alcohol market, it is easy to guess that this involves at least six-digit sums. And if Ukrainian producers withdraw from the russian market, the latter will be significantly redistributed.
What has the market looked like lately? Pytor kanygin, chairman of the subcommittee on entrepreneurship in the production and sale of alcohol of the russian chamber of commerce and industry, said so far last summer’s crisis “has subsided.” mr kanygin continued, “shelves are abundant with alcohol again, though the assortment has dwindled tenfold, and federal officials have calmed down. The business community does not threaten with a repetition of the crisis.” The russians are used to seeing the shelves in the wine stores or supermarkets full of imported drinks.
whisky of all sorts, Tequila, cointreau, Gin, best french brandies, branded wines from france, italy, Australia, california and south Africa. in russia people, of course, drink more vodka and beer, however, demand for wines has risen in the last years.
All this disappeared from the stores this year. first, the sanitary service of russia prohibited imports of wines from Georgia and moldavia due to their low quality. Then the major western wine and strong drinks suppliers were asked to take their goods back, because a new excise stamps and registration system regarding alcohol drinks was introduced starting from July 1. since the amount of stamps was not enough and the registration system did not work, this first of all hit the wine and strong drinks im porters. not having the ability to sell the already bought trade, they attempted to return it back to importers. but since this did not always work, many of them were suffering multi-million losses from keeping the purchased goods in warehouses. Then they started to sell it illegally practically for nothing through the “back door” to private stores, restaurants or to common wine and whiskey fans. The russian moscow region vodka and wine producers are more or less afloat. but the high quality brand vodka may disappear soon, unless the country succeeds in overcoming the current alcohol crisis.
Its consequences can hardly be predicted so far, since it is right in the middle. one thing is clear, that the range of this crisis exceeds all the previous events in the sphere of alcohol production and sales, starting from the radical transformation of the social and economic system in the beginning of the nineties.
As to its range, this crisis can be compared with the crisis of the mid Eighties, when the Ussr and the communist Party leadership started its comprehensive fight against “drinking and alcoholism”. in those far away years, just like today, it was conducted under the slogan of the people’s health protection from poor quality and illegal products. The common feature of these two events, separated by twenty years from each other, is that in both cases the crisis resulted from absolutely non-professional actions of the state officials, irrespective of whether they were in the party or in the governmental bodies, like now.
In order to understand what’s going on in the alcohol market of russia these days, we shall need to go back a little bit into the modern history of russia.
Abo lition in 1992 of the state monopoly on alco hol production resulted in the establishment of numerous liqueur producing factories and the practically incontrollable import of low quality, cheap alcohol, among which the white spirit “royal” was do minating.
Production of illegal hot drinks was immediately transferred from amateur to industrial base.
According to various sources, the so called “black Alcohol” occupied in the subsequent years from 30% to 70% of the entire strong drinks market.
Attempts to bring this sphere to order were made in the mid nineties. from that time on the new russia began its struggle for bringing order into the alcohol market of russia, in which the main goal was and has been the reduction of illegal production and the the increase of tax return. At the beginning for example, throughout several years a dominating position in alcohol imports was occupied by the national sports fund, which was granted exclusive benefits from the government. At the same time white spirit retail sales were banned. in due time the counterfeit vodka deliveries from the formed Ussr republics were cut off and thereafter its mass production was stopped in the russian regions, especially in the northern caucasus, where the white spirit was smuggled from the UsA through Georgia. The better part of the illegal vodka – up to 90% – started to be produced thereafter at legal factories. As a rule, it was bottled during the third shift, with the use of the same equipment and from the same tanks, as in the first two shifts of official production. This situation has remained the same until this date.
In 1997 russia turned to the world accepted excise collecting system based on the volume unit and not on the cost of production, but this still left the better part of all the tax returns for alcohol in the hands of those regions and cities where it was produced and sold. This lead to the situation when the regional authorities started to favor their producers, blocking deliveries from other rf subjects.
in the subsequent years authorities changed the excise rates and the rules of the excise stamps issuance. This kept the country’s alcohol production nervous and lead to either increase or decrease of the legal production. in the experts’ opinion, the lowest level of vodka and other drinks illegal production and turnover was reached in 2002, when it was 33.5 %.
According to official sources, the entire russian alcohol market volume in 2005 reached Us$7.4 billion. According to unofficial sources, this figure is three times bigger. vodka alone, according to the national Union of Alcohol market Participants, was sold for the amount of Us$13 billion. All together, according to the same Union, the sales of vodka reached 220 million decaliters or 4.4 billion bottles at an average price of Us$3.0 per bottle.
According to “business Analysts”, which has conducted research of the russian alcohol consumption, last year russia spent Us$14 billion buying vodka.
wine occupies the third place in terms of sales volumes, giving way to beer as well, in spite of the growing sales rate, as compared to vodka, whose popularity according to both official and unofficial data, has been gradually decreasing. The winemaking market volume reached 90 million decaliters in 2005.
Around 60% thereof was produced in russia. The annual turnover of the moscow grape wines market is assessed by the rbc agency in the amount of Us$300 million.
The largest in this country, moscow factory “crystal” became the leader in alcohol production based upon the last year results. Thus, as statistics say, in the fourth quarter of the last year “crystal” produced almost 3 million decaliters of alcohol, most of which was vodka. it’s share in the strong drinks production market of russia reached 6.3 percent. The second and third places were taken by the saint Petersburg “veda” and “russky Alcohol”, with 1.94 million deciliters and 1.9 million deciliters accordingly. Their market share was 4.2% and 4.1% accordingly. but let us not forget, that in russia all statistical data concerning internal alcohol production, import and consumption are very approximate. Thus, although such distribution of places within the first trio of this market segment is beyond any doubt, the figures should be regarded cautiously.
However the situation changed drastically already in the results of the first quarter of this year. Ac cording to the Goscomstat (state statistics com mittee), in the three months of 2006, the “veda” factory gained the lead with 1 million deciliters and 6.3% of the market, the “russky Alcohol” became the second with the sales of 988 thousand deciliters and the market share of 6.1 percent. “crystal” – the continuous throughout many years leader produced slightly over 500 thousand deciliters, taking a share of 3.2%. And all this happens while the factory’s capacity allows to produce 12 million deciliters.
noticeable is not only the downfall of the “crystal” production, which is almost four times less than in the end of last year, but the fact that production volumes of the other leaders also dropped radically.
simultaneously, the “veda” and “russky Alcohol” shares in the total production volume in the country have grown dramatically.
In the normal course of the economic development such radical market changes would require many years. however, it turned out that it was just enough to start yet another reform of the alcohol market. it was this reform that lead to the deepest crisis in the alcohol market in the modern history of russia.
The law “on the state regulation of the Ethyl, Alcohol and white spirit containing Goods Production and Turnover”, which is entering into force stage by stage from January 1 this year, must have radically resolved two main problems of the russian alcohol market: reduce to minimum the amount of illegal alcohol production in the country and become an efficient mechanism of struggle against corruption, which has affected all branches of the alcohol industry.
The United state Automated information Accounting system (EGAis), whose use was supposed to help in doing the above, should have become the main weapon in the above struggle. it should have been completely tracking down each bottle from the producer or the moment of the russian border crossing, in the event of import, until the stores shelves.
However, at the first stage all the market players were obliged to turn to new excise stamps with the bar-code, containing information of the producer, type and name of the product, white spirit content, etc. At first there were no stamps. when they appeared afterwards, they soon ran out. Therefore, many alcohol producing factories of this country stopped in the beginning of this year. Alcohol imports started to drastically shrink, due to the risk of not being able to sell the entire imported products by mid-year, when the sales should start exclusively with the new excise stamps. Altogether, according to distributors, 120 million bottles were imported into russia in the first half of the year, which was twice less than a year ago.
As of July 1, according to the customs service, only around 5% of the entire imported products were stamped with new stamps. Up to 200 million unsold bottles with the total cost of around Us$300 million remained in the warehouses with the old stamps and were withdrawn from the turnover.
But the most important thing was that the EGAis system never started working in time. it was supposed to be obligatory that all alcohol production pass through this system. All the rest was considered to be illegal. That’s why most of the alcohol producing factories in the country have been stopped, as well as the import of wine and other alcohol products.
As participants of the alcohol market pointed out in their complaint to the President of russia vladimir Putin, the EGAis system does not cope with huge volumes of information and despite the promises of its developers, it does not respond to the users’ requests in the automatic mode. Therefore, the users have to bring information personally to the system’s regional centers, where the expenditure invoices processing time increased by 4 – 6 times, while the goods received notes processing time increased from 10 minutes to 3-4 days. The users are also dissatisfied with the bar-coded stamps’ quality. Any mechanical impact, for example if a bottle is wiped with a wet duster, results in the inability for the scanner to read the bar-code. The EGAis system defaults and the imperfection of the new stamps, in the opinion of the alcohol market participants, would lead to the situation when the illegal products would take place of the legal products.
The Government of russia became concerned with the situation in the alcohol market only in July, when the crisis reached its apogee. Although, for example, the “crystal” factory already in June produced 90 percent less of its end product than in the same month of the previous year. After numerous coordinating meetings it was announced that by August the EGAis work will be rectified and the situation will return to norm. however, at the end of the first week of August, the finance minister Alexey koudrin had to admit that the system was not working.
Therefore, all the legal alcohol market participants have to hope that finally the EGAis system will start working and alcohol will start being delivered for sales in full.
The past half a year resulted in drastic changes in the alignment of forces among the alcohol market players. we mentioned already the shuffle among the leading vodka producers. however, these are probably not the final changes. To be taken very seriously are the Ukrainian vodka companies, whose product, by the way reached almost 98 percent of the import deliveries in this market segment a year ago. They intend to develop production in russia itself in the first place.
The souz-viktan company this year bought a second russian alcohol producing factory with the capacity of 3 million deciliters per year. now, the capacity of both of its facilities in russia will make 9.5 million deciliters. The similar profile company “nemiroff”, one of the most dynamically developing companies in the world, whose presence is very noticeable, has already announced its intention to build its own factory in russia. The danish-Ukrainian “image holding”, whose trade mark “khortitsa” is among the leading trio of the Ukrainian alcohol producers, announced in April of its intention to build a factory with the annual capacity of 10 million deciliters.Construction was planned to start in summer.
But the biggest changes will take place in the regional level of the alcohol market. The new law strips the regional administrations off the efficient instruments to support local producers. being left without such an important advantage before the major companies, they will unlikely effectively oppose their rush. And there is something to fight for. According to the experts’ assessment, in siberia only the vodka turnover reached almost Us$4 billion in 2005.
Radical changes have already taken place in the wine market. They are not only linked to the new law on the turnover regulations in the alcohol sphere, but to the measures taken by the russian authorities this year with respect to the moldavian and Georgian wines, which covered over 37 percent of the russian retail market. The rospotrebnadzor, official body of consumer’s protection, in march introduced a ban on the wines from those countries due to the harmful substances found in those wines. This was a painful blow not only for the moldavian and Georgian producers, but for the numerous russian companies.
Losses of the russian distributors have been already estimated in the amount of Us$600 million. it should also not be forgotten that businessmen from russia own 70 percent of the wine business in these republics.
However, consequences do not stop there. moldavia has been the traditionally largest wine material supplier to the russian wine factories and to champagne producers in the first place. since the times of the Ussr, half of the champagne in this country has been produced on the basis of such wine materials.
The vacant niche is already being taken by the wines from other countries, including china. however, it’s unlikely they will be able to fill the gap completely after the sanitary services disqualification of the moldavian and Georgian wines. Products of these two countries are in the lower and middle price segment among the imported wines.
Just like in the russian wine producing market, where 10 major players owned 40 percent of the product, the minor and middle level companies have continued dominating among the imported wines. Absence of any sufficient financial stability was most painfully reflected on the importers, who suffered enormous losses this year. in the opinion of this society’s representatives, half of the payers has already left the market, not seeing any perspective due to the unpredictability of the situation. Another 30 percent will leave if the EGAis system doesn’t start working in the near future.
The current situation has led to huge losses suffered not only by the entrepreneurs working in the alcohol market, but by the budget of the country as well. The Government is taking urgent measures to pull the country out of the alcohol crisis. The situation is aggravating because two major strong drinks and wine importing russian companies have brought actions against the EGAis producers and therefore the Government of russia. The case was reported to the President vladimir Putin who ordered an urgent ease of the situation. official sources in the rf Government gave assurances that this would be done before the end of this year.
