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FOOD AND BEVERAGES STILL PROMISING
by Bill Raisner

The giant Russian market for processed foods began stirring in the first quarter of
1994, when U.S. exports of these products jumped more than 300 percent over
the same period the previous year.  The steady growth of consumer buying power,
the weakness of domestic producers, and the gradual improvement of distribution
channels all point to expanding opportunities for U.S. companies.  Moreover, tariff
and other tax increases imposed on food imports in July have not seriously
restrained demand.  The greatest challenge facing U.S. food exporters actually
comes from Western European and East Asian competitors, who now dominate the
market.

Consumer Purchasing Power

Russians are buying more high-quality imported foods, quite simply, because they
can afford them.  Average real income increased 8 percent in 1994 despite a 17
percent fall in wages, because millions of Russians have significant second
incomes, in addition to their regular jobs.  Consumer purchasing power is bolstered
by Russia's success in holding inflation to between 8 and 11 percent since early
1995.  Moreover, the dramatic appreciation of the ruble relative to the U.S. dollar
since June, and the Russian Government's commitment to hold the ruble at a rate
ranging from 4,300 to 4,900 rubles to the dollar has laid a foundation for
continued imports despite the new tariffs.

Imported foods also do well in Russia because domestic products don't.  Overall
Russian food production has fallen dramatically since 1991, declining 15 and 20
percent respectively in 1993 and 1994.  Russian meat production fell by 32
percent in 1994, from its peak in 1990.  Food processors in particular have been
very slow to adapt to new conditions in Russia's emerging market economy, and
the quality and attractiveness of their products remains low. 

Protectionist tariffs and taxes imposed in July, which run from 15 to 30 percent,
have failed to deter Russian consumers, who are drawn by the perceived quality of
foreign products.  Some domestic food processors have been able to attract
foreign capital to upgrade the quality of their products,  most notably in
confectionery and soft drinks.  But progress is slow enough that importers are
unlikely to be affected within the next several years.

Improved Distribution

The privatization of the Russian wholesale and retail distribution systems increases
opportunities for food importers, as well, since it greatly improves access to
Russia's consumers.  By mid-1994, 76 percent of Russia's retail trade had been
privatized.  The Commercial Service of the United States estimates that there are
now 9,000 private retailers for consumer goods and food products in St.
Petersburg alone.  

Progress in the wholesale sector has been slower, but is still significant.  By the
end of 1994 nearly 1,700 state-operated wholesalers had been privatized, and an
additional  6,500 private wholesalers had been created.  In the St. Petersburg
region there are now nearly 5,000 wholesalers, the Commercial Service reports. 
The transformation of wholesale distribution has been particularly important in
areas outside Moscow, with Russia's 24 largest population centers (outside the
capital) taking fully 75 percent of consumer product imports. 

Beating the Competition

So far, U.S. companies have been remarkably slow to take full advantage of
Russia's consumer-ready food market.  The Foreign Agriculture Service (FAS) of
the U.S. Department of Agriculture reports that U.S. products comprise only 15
percent of total Russian imports of consumer-ready foods.  Western Europe
supplies most of the balance in European Russia, while East Asian and Australian
importers are strongest in the Russian Far East and Siberia.   

Sheer distance is often a disadvantage for U.S. companies.  Russian importers
facing domestic interest rates as high as 200 percent are often reluctant to wait 5
or 6 weeks to receive products from the U.S. when similar products sourced from
Europe or Asia take less than a week.  Asia-Pacific exporters in particular offer
decidedly favorable financing terms compared to their U.S. counterparts, as well. 
U.S. exporters should consider showing greater flexibility in financing, such as the
extension of consignment terms or supplier credits to Russian buyers, to be more
competitive.  For more information on markets for consumer-ready food and
beverages contact the BISNIS Flashfax at (202) 482-3145 and ask for document
#s 6575, 6576 and 7069.

Bill Raisner covers agribusiness for BISNIS.
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