Voluntary Report - public distribution

**Date:** 11/20/2005

**GAIN Report Number:** RS5315

RS5315

**Russian Federation**

**Market Development Reports**

**The Russian Far East**

**2005**

**Approved by:**

![](media/image1.wmf)Eric Wenberg, ATO Director

American Embassy, Moscow

**Prepared by:**

Svetlana Ilyina

**Report Highlights:**

Vladivostok and the Russian Far East (RFE) are a market for U.S. foods
undergoing an impressive economic transformation at present. Food retail
outlets and new restaurants are opening at a quick pace, as the
region\'s consumers spend more on high quality foods. The RFE is home to
more domestic and foreign investment projects than can be listed easily
and economic prospects are bright as the resource-rich RFE develops.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Moscow ATO \[RS4\]

\[RS\]

# Russian Far East profile:

The Russian Far East (RFE) is Russia's largest region, constituting
215,000 square miles, or 36.4 percent of the entire country. The RFE
borders China and North Korea on the south, and Japan on the east.
Maritime borders include the Sea of Okhotsk, Japan and Bering Sea.

The Russian Far East is endowed with unique and rich national resources.
It contains Russia's largest reserves of some traditional raw materials
and minerals: antimony, boron, tin (up to 95 percent of national
reserves), fluorspar and mercury (up to 60 percent). The world' largest
diamond province is located in the northwest and contains more than 80
percent of Russia's diamond reserves. Also, the RFE is one of Russia's
most important gold producing areas (40 percent of Russian reserves, 55
percent of national mining operations).

Fuel and energy resources include oil (some nine billion tons) and gas
(about 25 trillion cubic meters), brown and black coal. The most
important biological resources of the region are fish and seafood. The
vast RFE ocean area contains the world's largest stocks of salmon,
codfish---some 60 percent of Russia's reserves. As well the region's
forest resources account for 35 percent of the national total.

#  General Economic Information:

The RFE's population is 6.68 million, with the main concentration in
Primorskiy Kray (2.06 million) and Khabarovskiy Kray (1.44 million).
Women account for 51.1 percent of the population, nine percent are
children under 18 years. The region is 76 percent urban, and 26 percent
live in agricultural areas. The largest cites in the RFE are Vladivostok
(591,800) and Khabarovsk (582,700). About 37 percent of the region's
population is concentrated in nine cities. Though the population of the
Russian Far East decreased by 39,200 in 2004, the decline in population
has begun to level out.

For the last four years, the region has exhibited steady economic
growth. The volume of the RFE industrial production increased by seven
percent annually, reaching 669 million Rubles in 2004. More importantly,
a distinct trend in the region is a steadily growing consumers' income.
Consumer incomes have grown even faster, topped off by an estimated 14
percent jump in 2003. In 2002, aggregate consumers' income totaled 78
billion rubles (USD 2.6 billion), an increase of 35.2 percent since
2001. Real disposable income increased by 18 percent.

In 2004, the volume of foreign investment to the RFE totaled to 159
billion Rubles, an 11.5 percent increase compared to the previous year.
The main investors in the regional economy are the Netherlands (63
percent), Russian offshore companies (eight percent), USA (five percent)
and Great Britain (four percent).

# Agricultural production 

Due to its northerly location and relatively extreme climate, the RFE is
unable to produce enough agricultural products to feed its population
and the rapidly developing food processing industry. Production
agriculture is most developed in the southern RFE regions: Amurskaya
Oblast, Khabarovskiy and Primorskiy Kray. Soybeans, corn, feed grains,
and vegetables are cultivated. In 2004 the output of the agricultural
products in the region totaled to 446 billion Rubles (1.1 percent over
previous year). The region produced 144,100 tons of meat, 990.2 million
eggs, 335,700 tons of soybeans, 609,900 tons of milk (96.6 percent of
2003), 269,400 tons of grain (83.5 percent of 2004), 1.67 million tons
of potatoes (93.7 percent of 2003 crop), 571,300 tons of other
vegetables.

The potential of RFE agriculture is greater than current output levels
indicate, but not without lower energy costs and a revolution towards
Western management of farms. During the post-Soviet period, agricultural
production decreased significantly: cultivated land by 31 percent,
arable land by 29.2 percent, row crops by 61 percent, and grain
production by 76 percent.

In 2003, from the 2.26 million hectares of arable land only 1.3 million
were cultivated. As well, from 1999 to 2003, cattle herds decreased by
63 percent, swine population by 81.5 percent, and poultry by 72 percent.
The region imports a lot of agricultural products for the rapidly
developing food processing industry as well as high-end products.
Currently, only seven percent of population is engaged in agricultural
business.

# Food imports in RFE

The RFE has always imported agricultural and food products. The
post-perestroika years had a very negative effect on regional
agricultural production. As a result, the volume of agricultural product
imports and foods increased significantly.

RFE\'s food supply comes from two channels: direct import from Pacific
RIM and Asian Countries: China, South Korea, USA, Australia, New
Zealand, Vietnam, India, etc. Importers distribute products from the
Russian Far East to Eastern Siberia areas that include several large
cities such as Novosibirsk and Irkutsk. Eastern Siberia's is inhabited
by 20.4 million people that, although mostly rural, is home to resource
rich areas. Vladivostok Commercial port is the main RFE port and handles
80% of all food shipments. Importers distribute food products to quick
developing, major retail stores. Currently fresh fruits (apples, pears,
oranges, pomelas, lemons, grapes), frozen meat for processing and of
restaurant quality, meat by products, poultry, ingredients for food
processing, some foodstuffs for retail and restaurants: microwave pop
corn, frozen potato products and fries, fish and seafood for Japanese
cuisine is imported from US directly. Before the 1998 default the RFE
had more American products for retail: salad dressings, seasonings,
cereals, candy bars, canned and frozen vegetables, and juices. There
were some branded U.S. grocery retail products sold. The ruble crash and
resulting import substitution made U.S. products more expensive for the
Russian market. Now with several years of economic growth, incomes are
rising in Russia, and with the favorable dollar rate it can be a good
moment to enter the market with American products of top quality and
competitive price.

The RFE uses products from Turkey, Israel, Argentina, South America,
Brazil, and the United States as transshipped though Moscow. The
shipments from St. Petersburg and those trucked from European countries
are consolidated in Moscow and distributed. One Vladivostok distributor
brings from Moscow consolidated containers of different products already
customs cleared and labeled. American wines, sauces, dry fruits,
almonds, cheesecakes are coming to the RFE market through Moscow. This
adds unnecessary expense for RFE customers with the Moscow importer
earning a commission and the customer paying 6,000 miles of
transportation expenses.

In 2004, the region imported 29,900 tons of meat products totaling
\$28.4 million, including 14,700 thousand tons from China, 15,200 tons
from the United States. About 212,000 tons of vegetables were imported
from China and 2,800 tons from the United States. In 2004, the total
amount spent on fruit imports reached \$43.4 million. The volume of
fruit imports totaled 83,500 tons, or \$32.8 million. The main fruit
supplier to the RFE is China. Among other important agricultural import
items are: oilseeds (6,900 tons China), rice

(126,900 tons from China and 70,900 tons from Thailand), and sugar
(66,500 tons from Thailand).

Currently China is the biggest supplier of agricultural and food items
to the Russian Far East. The RFE market is price sensitive and in many
items, China is the most competitive. Further, the proximity of China
simplifies trade logistics; it takes five hours to bring products from
the Chinese border to Vladivostok, the main market and transport hub.
However, Russian customers have become more and more concerned about
product quality and food safety, and Chinese products do not have a good
image on the local market. The consumer in the RFE provides a niche for
some American products, and recent favorable changes in exchange rates
have improved the price competitiveness of many U.S. food products. As
well, the RFE offers a natural market from the U.S. West coast. On the
import side, 30 seaports scattered along RFE's coast handle the bulk of
Russia's foreign trade flows to/from Asian Pacific countries. The Trans
Siberian Railroad, with direct access to these ports, opens the Central
and Eastern Siberia markets that include an additional 10 million
consumers.

**Statistics and Trends:**

-   Food Processing has grown as much as 27-30 percent annually since
    2001, in the meat and dairy sector, while prepared foods, such as
    grocery items, snacks, and confectionary product processing has
    grown 12 percent each year.

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-   Retail trade turnover in January-March 2004 increased by 27 percent
    over the same period of 2003. Sales volume of food products goods
    increased by 25.9 percent.

-   Per capita GDP was \$2,400 in 2002, but at Purchasing Power Parity
    rates was \$8,300.

-   Growing consumer demand has encouraged rapid expansion in food
    retail (up 22 percent in 2002), HRI (up 28 percent), and food
    processing (up 14 percent).

-   As a result, imports of intermediate and consumer-oriented food
    products to the RFE in 2004 increased 30 percent and 21 percent,
    respectively

### Table 1. Advantages and Challenges

  ----------------------------------- -----------------------------------
  ***Advantages***                    ***Challenges***

  Five consecutive years of strong    While the middle class clearly is
  economic growth and rising incomes  expanding, many consumers still are
  boost demand for new and better     not benefiting fully from the
  quality food products               growth of the Russian economy.

  Despite steady increases in         Some consumers are wary of imported
  domestic food production, imports   food products, frightened by
  are growing at a strong pace        misleading and inaccurate stories
                                      in the local media

  Inconsistent availability and       Strong competition from products
  quality for some local products     supplied by nearby West European
  create import opportunities for a   countries and by increasingly
  variety of food and beverage        sophisticated local producers
  products                            

  Local food processors must source   Processors often lack access to
  new and better quality food         cheap credit, so may be forced to
  ingredients to compete with imports limit growth or use cheaper
  of consumer-oriented products       imported or local inputs

  New western-style supermarkets are  About 40-50 percent of food
  rapidly expanding to meet consumer  purchases in larger cities and 70
  demand for variety and service,     percent or more of food purchases
  creating a good venue for imported  in the regions are still made in
  products                            open markets or small Soviet-style
                                      stores

  Importers/distributors/processors   Longer shipping time for U.S.
  are beginning to look beyond        products ties up importers' funds
  traditional local or West European  and complicates supply logistics.
  suppliers                           
  ----------------------------------- -----------------------------------

### 

Contact the report author, Svetlana Ilyina, on market opportunities in
the Russian Far East at the Agricultural Trade Office, U.S. Consulate in
Vladivostok. <Svetlana.ilyina@usda.gov>. ATO Vladivostok supports a
culinary festival in Vladivostok, held each September, for those wanting
to promote their products. Read about market opportunities across Russia
at FAS' Russia website [http://eng.usda.ru](http://eng.usda.ru/)