Can the Russian drinks industry survive?

The Russian drinks industry has faced serious issues since the beginning of the Ukraine war with increasing isolation putting pressure on the sector. Eugene Gerden reports.

In the time before 24 February 2022, Russia’s drinks sector was one of the fastest growing segments in the entire Russian food and beverages’ market with the annual growth rates up to 15% in some market categories.

But the beginning of Russian-Ukranian war put an end for hopes of the further growth of the industry, at least at the same rates.

The most negative news for producers has been an imposition of a ban on the exports of Russian drinks, and primarily spirits, to Western market, as a result of 5th package of sanctions of the EU. Many firms had significantly increased their supplies to the EU previously, the UK and even the US markets in recent years.

While some of their supplies are still ongoing, according to Russian producers, there is a high possibility that they will be also suspended, as sanctions’ pressure continues to tighten.

Bans

In addition, some Western companies — the former partners of the Russian firms — are initiating their own corporate bans, even with non-sanctioned Russian drinks’ producers.

Sergei Lebedev General Director of the Alcohol Siberian Group, one of Russia’s leading spirits’ producers and exporters, said the company is preparing for the worst case scenario: a complete ban on deliveries to Western markets.

Sergei Lebedev said: “In general, exports are more profitable than sales in the domestic market. In addition, it helps to build a brand image, especially in the premium segment.

“Plus presence in the Duty Free channel at key airports is also important for supporting global brands, as a consumer with above-average income can see a properly presented product.”

Global market

Before the Ukraine war, the EU market had large volume sales in Germany and the Baltic states. In addition, the UK, the US and France all were important sales markets as well.

Due to current restrictions, most of producers currently have switched to the supplies to alternative markets of Asian and Latin American states, although the consumption of spirits among local customers is significantly lower those of West, while procurement prices are lower.

In this regard, according to experts, drinks’ producers hope to compensate their exports’ drops by the increase of supplies to domestic market, although they are also experiencing serious problems at home too.

Loans

High cost of loans currently remains one of the biggest problems for the majority of Russian drinks’ producers. This is also due to traditionally high debt load of the
industry, as well as recent sharp increase of key rate by the Russian Central Bank.

The latter has led to a further increase of the cost of loans for producers, which have already grown by between two and two-and-a-half times in the last two years.

The situation is also complicated by the lack of packaging and other components, which are used in their production. In case of packaging and labels, most of which were traditionally
imported from Finland – the country which also joined the sanctions’ regime against Russia.

While some of Russian producers have been able to switch on the supplies from China, in recent weeks they have faced with serious problems due to the refusal of the major Chinese banks to conduct their transactions for the purchases of these products even in yuans from their Chinese suppliers due to sanctions’ issues.

For example, on 7 February, Zhejiang Chouzhou Commercial Bank, the main Chinese bank for Russian drinks’ producers and exporters has announced the suspension of transactions.

Increased prices

In order to compensate their losses from sanctions and export restrictions, leading Russian drinks’ producers have already been forced to increase prices for their products.

According to data of the Ministry of Economy, last year the growth of prices varied in the range of 20%-50%, depending on the market category, while the growth of prices is ongoing this year.

This is also confirmed by some independent Russian analysts in drinks’ sector. Since the beginning of the current year prices for most of drinks have been steadily growing, while among the reasons for this are increasing excise taxes, as well as growing production costs and logistics.

Experts of the Russian analyst agency Gradus believe for the whole 2024 the growth of prices will be also 20%-50%, depending on the category.

So far, manufacturers have already notified Russian retailers of price increases. At the same time some analysts believe that the rise of prices will not lead to a sharp drop of drinks’ sales in Russia, while rather, consumers will switch to alternative and budget brands, primarily of domestic origin.

Leading producers

The beginning of the war led to massive suspension of drinks’ exports to Russia, primarily from Western countries and by such leading producers as Diageo, LVMH, Pernod Ricard.

In regard of other smaller producers, some of them continue to supply Russia, with drinks priced up to €300.

At the same the US suspended all official supplies of spirits to Russia regardless of price.

Vodka remains the most popular strong alcoholic drink in Russia: it accounts for 39% of spirits sales, with the most popular bottle size is the classic half-litre.

Whiskey

While Western sanctions did not have a major negative impact on the vodka market in Russia, the situation with whiskey is much more worse, since almost 100% of the Russian market traditionally accounted for imported drink.

As Alexander Lipilin, head of the Russian wine trade house Fort, said in an interview with the Russian Kommersant business, the whiskey sector of Russia fell by 70%, with the biggest decline in middle-priced segment.

That was due to the exodus of most of Irish, Scottish and US producers from the market.

The supplies of premium drinks and spirits to Russia are ongoing through parallel imports and other semi-legal schemes, however prices for such products are usually by several times higher their real market value.

But according to experts most of these drinks are successfully sold in the HORECA segment and fine dining restaurants of Moscow and St. Petersburg.

Cognac

In the meantime, and in contrast to whiskey, the situation in the Cognac segment is much better, which is also due to the high share of Armenian suppliers, with their flagship Ararat brand.

Particular hopes are also put on the increase of supplies of rum from some Latin American states and Cuba, with the demand for which in Russia has significantly increased in recent years.

As for domestic production, so far, some of leading Russian drinks manufacturers and distributors have announced their plans to expand their production portfolio, while most of such products will be sold at prices significantly lower than those of Western imports.