When the Going Gets Tough ... Buy Russian

In the remote, tsarist past, Russia was one of the world’s major exporters of wheat and other food products. Admittedly, Russia then included Ukraine, the proverbial “bread basket of Europe.” Still, the contrast with today could not be more stark. After seven decades of mismanagement, Russian farms and factories are too weak even to feed Russia alone.

Seven years ago, when the Soviet Union collapsed, the population’s growing demand for more and better foodstuffs was met by imports, rather than by serious reform of the agricultural sector. Imported foods poured into Russia like a torrent. Of course, the slick packaging, higher quality and greater reliability came at a higher cost. But, after decades of food lines and rationing, Russians were willing to pay that price. Until August 17, 1998, when the banking and financial crisis hit. Millions saw their savings and earnings become worthless overnight. Foreign food imports suddenly became an unaffordable luxury. As if waking up from a decade-long dream, Russians began searching for homegrown goods and found the pickings surprisingly slim. 

This was not the first post-Soviet surge in demand for domestic foodstuffs. A few years ago, when Europe was rocked by the mad cow disease scare, Russians shunned foreign meat. Food stores and wholesale food markets hung signs next to meat: otechestvennaya govyadina (domestic meat). Of course, whether it was or not was anyone’s guess. But this panic was short-lived and had nothing to do with economics.

There have also been government led efforts to build demand for Russian foodstuffs. In the fall of 1997, President Boris Yeltsin threw his weight behind domestic producers by visiting a food show at Moscow’s Manezh hall exhibiting domestic production. He followed the visit up with a radio address to the nation in which he urged his fellow countrymen to “Buy Russian.”

Needless to say, Russians, like any other consumers, tend to place economic considerations ahead of nationality when making a purchase. While the quality of imported goods is often higher, prices could be lower (thanks to smuggling) and supplies more plentiful. What is more, the “Buy Russian” campaign lacked consistency and support from the government. It rarely became more than a nice-sounding line in a politician’s speech. In the summer of 1998, just before the economic crisis broke, then deputy Premier Boris Nemtsov visited St. Petersburg, where he launched a campaign to promote local goods. He called for a policy of “reasonable protectionism.”

A few weeks later, during a visit to Novgorod, President Yeltsin visited the Novgorod-based joint stock company, Novgorodsky Myasnoy Dvor (literally, “Meat Court). The company had complained that the Economics Ministry “does not protect the domestic producer.” This prompted Yeltsin to call then Economics Minister Yakov Urinson “a theoretician coming out of a laboratory without any knowledge of practice.” The factory is owned by food giant Cherkizovsky, which has a 10% share of the Russian meat  market. Cherkizovsky was reportedly trying unsuccessfully to get Urinson’s Ministry to increase import tariffs from 20% to 30%. Ironically, it was during this visit to Novgorod that Yeltsin declared that the ruble would not be devaluated. Three days later it was.

Comparative Advantage

The economic and banking crisis that followed “freed” Russians of their savings (at present, 83% of Russian have no savings whatsoever). Cheaper domestic foodstuffs became more attractive as imports either disappeared or sold at prohibitive prices – as the ruble exchange rate climbed, stores had to increase ruble prices on foreign-made goods, which the stores or distributors had to pay for in dollars. 

Western restaurants were also forced to turn to local suppliers. A Moscow Times survey of Western restaurants in Moscow revealed that the crisis had “accelerated the restaurants’ move toward buying more products from the domestic market.” One popular local restaurant, Patio Pizza, reported that the share of its purchases from local supplier had increased from 10% to 50%.

So it was that, despite the general ruin of the domestic stock market, prospects for domestic food companies looked bright. In a Crisis Supplement to the authoritative food trade magazine, Vitrina, Russian food company stocks were ranked among the most stable.

Vitrina reporter Igor Serdyuk admitted in an interview with Russian Life that many observers of the Russian food market seriously feel that the current market situation may help local producers. For food importers have been weakened not just by price hikes, which have discouraged Russian buyers, but also by a radical decline in Western companies’ advertising.

Moreover, in the aftermath of the ruble devaluation, many multinational food producers suspended local production. The British confectionery giant Cadbury temporarily halted production at its Russian candy factory in Chudovo, not far from St. Petersburg. According to Cadbury spokeswoman Dora McCabe, “sales were difficult in the current conditions.” Another candy giant, Mars, which built a factory in Stupino, in the Moscow region, was reportedly forced to fire workers from its chocolate factory. [According to the Moscow Times, Cabdury and Mars invested $120 mn and $150 mn in their factories, respectively]. 

The soft drink giant Coca-Cola, which has had high visibility in the local market of late, was one of the rare foreign market players not pulling back. The company announced an eight-year-long sponsorship contract with the Russian national soccer team. Given the team’s abysmal performance of late, the company’s action was a true sign of commitment to the market.

Meanwhile, domestic candy producer Red October continued its expansion, despite the crisis. In June 1998, Red October’s main competitor, the Babaevsky Concern (largely owned by the once-powerful Inkombank) was boasting that it was “three times as powerful as Red October” and would soon control 1/3 of the Russian market. But Inkombank was one of the biggest casualties of the banking crisis, and Red October is catching up. 

In late September, Red October bought the St. Petersburg factory Petrokonf from the US company Kraft Jacobs Suchard. Petrokonf produces 18,000 tons of candy a year, including such famous chocolate brands as Mishka na Severe (Northern Bear). The purchase of Petrokonf was part of the company’s strategic expansion, aimed at the creation of a huge holding company that will enable the company to lower costs. Food market observers Natalya Zhukova and Galina Kostina with the authoritative weekly Expert said they believe that Red October can move ahead of Babaevsky. Unlike the formerly powerful market leader, they said, Red October has chosen tactics that will allow it to weather the crisis – namely renouncing dependence on strategic foreign investors in favor of a focus on domestic production.

Red October was not the only Russian food producer which used the crisis to expand in the domestic food market. This fall, Moscow-based dairy giant WILL-BILL DANN acquired a controlling stake in Novosibirsk’s largest dairy enterprise. In the Moscow region, a group of dairy producers which supply 500,000 tons of products to Moscow (or 56% of the total supply to Russia’s capital) have developed a complex, seven-year program to expand supplies to the capital. 

As the crisis dragged on, local company’s marketing efforts began to increasingly focus on the Buying Russian theme. And these efforts fell on fertile soil. This is especially true among the middle- and older-generations, which have developed a taste for traditional Russian sausage recipes. Take for instance the Mikoyanovsky factory, named for Anastas Mikoyan, who was People’s Commissar for Food early in his career, from 1934-1938. Movie director Elem Klimov recalled how Mikoyanovskaya sausage “just melted on our tongue.” Starting in the 1970s, after Russia began experiencing its first serious food shortages, this sausage was never sold to the public at large – only at special nomenklatura cafeterias at ridiculously low prices. It was even produced at a special workshop – No. 1, dubbed the “Kremlin line,” where no additives like soy were even considered. Now Mikoyanovsky has resumed production of old sausage recipes, making them accessible to the entire population. 

Mikoyanovsky is not alone. The Cherkizovsky factory developed production of the famous Doktorskaya brand sausage, after successfully bringing some Russian slaughterhouses under its umbrella. Two months after the crisis struck, a meat processing factory in Klin advertised on a popular Moscow radio station that its meat products were “made only of fresh Russian meat.”

Such a commercial is surely music to the ears of those who felt the country’s dependence on food imports had reached frightening proportions. Before the crisis, at least 60% of food Russians consumed was imported. For Moscow, the figure was even higher. Igor Lisinenko, president of the Tea and Coffee Association, said the government “committed a crime when it allowed such a high level of dependence on food imports. In recent years, the country has been ‘eating up’ its export earnings on food imports. Food exuberance is a great thing, provided it is based on the development of domestic agriculture.”

Local food producers also complain of unfair competition by Russian food importers. Some allegedly smuggle foodstuffs into Russia, avoiding tariffs that would make their products more costly to the consumer. Yevgeny Vasyurin, general director of Moscow’s Tagansky Meat Factory said that “importers have learned to artfully by-pass Russian legislation ... It is impossible to compete with their cheap production. Illegal importers often stick popular Russian brand names on their labels to court the local customer.” The Tagansky Meat Factory was one of the first to ring this alarm, warning about the smuggling of counterfeit Russian sausage brands from Poland and Belgium. 

Valery Kalutsky, head of marketing at the Moscow-based pasta producer EXTRA-M, told Russian Life that as much as 30% of Russian food imports bypass customs. As a result, he said, prices for some pastas, “especially those made in Turkey and Iran,” are substantially lower than prices for analogous domestic products. “Plus,” he said, “foreign producers of pasta enjoy different preferential loans and subsidies, while our domestic producers have virtually no benefits. For example, the cost of flour for Indonesian pasta producers is half of our cost ... We don’t have such privileges.”

Two years ago, a group representing the majority of Russian pasta producers approached the Russian government with specific proposals aimed at introducing restrictive quotas on pasta imports. “In parallel,” Kalutsky said, “we proposed that the state provide opportunities for domestic pasta producers to take out preferential loans – to help us develop our own food base. We didn’t just ask for a curtain [on imports]. We are all for healthy competition. But when this competition begins with unequal conditions, of course [pasta importers] are ahead of us. They saturated the market. As a result, Russians found themselves at a disadvantage.” 

Kalutsky said that there ought to be an effort to promote the slogan “Buy Russian,” “as was the case in America” and that the mass media should be used “to explain to Russian consumers that Russian products are not that bad and are quite competitive.” 

The Food Chain

Ironically, a good part of domestic foodstuff’s contemporary competitiveness can be attributed to the import of foreign made processing equipment and packaging machines. “Unfortunately,” Kalutsky said, “Russia doesn’t produce such equipment at a decent level of quality.”

But even equipped with state-of-the-art equipment, domestic pasta producers simply cannot fill all the gaps. “Of the 930,000 tons of yearly demand for pasta, domestic producers can cover just 500,000 tons,” Kalutsky said. “Of course, we could unfreeze capacity which has been frozen for different reasons and add, say another 200,000 tons, but we still won’t be able to cover all demand. When the crisis broke out in early September, we were delaying orders from our customers until October, since we couldn’t satisfy demand. Our equipment was working at peak capacity …”

Thus, domestic food producers find themselves in a situation vis-à-vis newly opened market niches that is perfectly illustrated by the old Russian saying, “the eye sees it, but the tooth can’t bite it.” “Of course, they would love to [fill in all the niches],” said Richard Ali, director for Europe, Russia and the Middle East for the US Meat Export Federation, a non-profit organization encompassing over 100 US exporters and suppliers of red meat. But to think this is realistic, he said, is “a short-sighted view.”

Many Russian analysts agree. According to the authoritative financial weekly Dengi (“Money”), domestic producers can at best cover 50-60% of Russia’s food needs. In order to increase production, one would need to make huge investments. For instance, every second sausage in Russia is made with imported meat. In order to switch all meat-processing factories to 100% domestic raw materials, the country would need to raise between 50 and 60 mn cows and pigs (Russia now has a stock of just 17 mn pigs and 33 mn head of cattle). Such an increase would take at least a decade. 

“Producing cattle and pig is not like turning on a tap and water comes out,” said Ali. “It takes time. What we think is that producers and manufacturers are importing products, and they are employing people. That actually builds more demand. And this helps the Russian livestock industry in the long-term to increase its production. We certainly are not trying to swamp the Russian [livestock] industry, but to develop economic growth, which means Russian farmers will benefit too in the long term.” 

Of course, it doesn’t begin and end with cattle. Russia’s feed grain stocks (estimated at 33 mn tons in 1998 by Dengi) are barely enough to feed the current levels of livestock. So, to increase the number of livestock to the noted levels, Russia would need to triple its grain crop (or better – this year’s crop was the worst in 40 years, just 47.3 mn tons, whereas the previous year it was over 88 mn tons). Which means that Russia would need to buy thousands of new combine harvesters (Russia now counts just two functional combine harvesters per thousand hectares of land, vs. 32 per thousand hectares in Germany). Plus, one would need to restore a national system of land quality improvement, build new roads in the countryside, provide farmers and kolkhozes with enough money to buy lubricants, mineral fertilizers and pesticides. And the Russian budget, with its huge deficits, has nothing to offer.

The poultry market faces similar problems. Andrei Mezentsev, public relations manager at YAR Communications (the PR agent for the US Poultry and Eggs Export Council), said that, in 1997, Russia imported 56% of all poultry it consumed (1.8 mn tons). Filling all this consumption with domestic supplies would essentially require a doubling of annual production. Of course, such a move would not be good for US companies: Noviye Izvestia recently reported that Russia consumes 40% of all chicken legs exported from the US (and 32% of all pork exports and 41% of beef exports from EU countries). But then that is hardly the of much concern to those seeking to make Russia more independent of food imports. 

The Truth is Out There

So what are boosters of the domestic food chain to do? “Face the truth,” advised Vitrina’s Igor Serdyuk. Commenting on the proposed protectionist measures, Serduyk said: “I wonder what they are going to control? There is no money in the country and they pretend they will be controlling something?! I am saying – control whatever you want, but let money and products flow into the country. Make this policy a well-thought-out one, don’t let the black market flourish ... Reinforce control over smuggled foodstuffs, but make legal imports profitable – for instance import of raw materials. Simple prohibitive measures won’t help.” 

Serdyuk said he feels it is naïve to assume that the financial crisis will not have any negative impact on major Russian food producers. Of course, he said, it will most seriously hurt consumers. “Our agriculture is not efficient ... And if you look in-depth at the real purchasing power in our country, at the level of supply our agriculture is able to offer, then you will see that it is unrealistic to feed this country at those [high] prices.” 

Thus, foreign foodstuff producers have plenty of grounds for optimism. Prat-Gay Cristobal, regional director of the Molinos food company, put it well. Cristobal participated in the recent World Food Show in Moscow, and observed that “Russians, of course, produce vegetable oil. But not enough for such a huge country. Housewives may well refuse to buy Western instant coffee or chocolate, but they will keep buying the pasta and the vegetable oil Ideal [Molinos’ brand], although likely in smaller quantities.”

Clearly, the Russian government, embroiled in crisis, has no long-range plan for the development of agriculture and the domestic food industry. Large-scale protectionism or promotion of a Buy Russian campaign also do not seem in the cards. If the past is any guide, Prime Minister Yevgeny Primakov’s government will take only tactical, stop-gap measures, providing benefits and perks here and there, or curtailing imports in some less important food sectors, while trying to bring to heel food smuggling and counterfeiting. 

Primakov is nothing if not a realist, and is not wont to allow any governmental drive for consumer patriotism to deteriorate into jingoism. He well realizes that food shortages can only aggravate the difficult economic and political situation in Russia – the main thing is to see that Russia’s tired and impoverished people are fed. Thus, Primakov recently cancelled the 3% import duty on basic food imports such as meat, butter and vegetable oil and dairy products. [As this issue was going to press, the Russian government also inked a deal with the US for a $600 mn, 20 year loan that will be used to purchase food from the US. The US will also donate 1.5 mn tons of wheat to Russia.]

All of this is not to say that the Russian government should not do something direct and concrete to help domestic producers. Vadim Travkin, managing director of AmiVetra marketing company said in an interview with Vitrina that, in the long-term, Russian producers could play a much more noticeable role in the Russian market, if the Russian government could lighten their tax burden. Such a policy might also encourage more foreign producers to launch their own food production on Russian soil. Which will create new jobs and strengthen the domestic food industry. 

But the government cannot save the Russian food industry. Only competition can do that. Consumers will vote with their pocketbooks. They will not buy goods simply because they are Russian. For Russian goods to succeed in the long term, instead of simply offering a palatable solution in a crisis, they have to offer the best value for the price. And, for that, competition needs to be open and fair. 

“Everybody thinks their local production is the best ... and healthier,” said US Meat Export Federation’s Ali. “But most of [Russian] sausage contains imported meat. It is the recipes they use for the local market which make it different. But then again, now you see more hot-dog stands. And McDonalds, of course, was not a Russian taste. Plus, Russian producers are producing for McDonalds ... Homegrown versions [of meat products] will produce competition; competition will improve innovation and benefit everybody. Thus, everyone is open to new ideas. There is a new idea and there is a new product. That is good for the society.”  RL