**COUNTRYCOMMERCIAL GUIDE--RUSSIAN FEDERATION**

**FISCALYEAR  2000**

 

****

**V.  LEADING SECTORS FOR U.S. EXPORTS ANDINVESTMENT**

 

 

As of mid-1998, U.S. exports to Russia were up 25percent and on pace toward $4.2 billion. With the autumn 1998 freeze-up of payments in the Russian bankingsystem, and with the lower purchasing power of the ruble, U.S. exports toRussia finished the year at $3.6 billion, still a record high.  During the first quarter of 1999,American exports to Russia were down 65% from the first quarter of 1998, aclear reflection of lower purchasing power as well as the reluctance of manyWestern banks to accept letters of credit or to extend other types of financinghere.  Lately, however, whilepurchasing power remains down, the ruble has steadied, banks have once morebegun processing payments reliably, and Russian export earnings are up, pavingthe way for a slow recovery of U.S. exports to Russia in the second half of1999. 

 

**BestProspects for Non-Agricultural Goods and Services**

 

After decades of separation from world markets,Russia today is a tremendous potential market for most U.S. goods andservices.  Demand has emerged inwaves.  First, in the early 1990s, camedemand for U.S. food products, which has remained strong.  Strong demand for U.S. consumerproducts followed.  1995 saw asurge in demand for construction materials, hotel and restaurant equipment, andfurniture.  With a resumption ofeconomic growth, there should be renewed demand for U.S.-made equipment andservices, especially in foreign currency-earning sectors (oil and gas, mining,timber), and in information technology (computers, software andtelecommunications).  

 

Over the next decade, as restructured Russianindustries gain financial health, Russia will become a good market for U.S.industrial equipment and components, particularly food processing equipment andindustrial process controls.  Oncemarket access and financing issues are resolved, Russia promises to become amajor market for U.S. aircraft, components and avionics, as well as autos inniche markets.

 

It is important to note that many industrial goodsproduced by Russian companies and sold on the domestic market are sold not forcash, but in countertrade or debt-swap transactions.  This greatly detracts from the reliability of estimates oftotal market size for products of Russian industry.  

 

**--1.  Oil and Gas Equipment and Services(OGM, OGS)**

(HS categories381510, 382490, 7304291055, 7304296000, 7304216000, 7304213000, 7304295000,7304293055

8413500010,8413600050, 842519, 8426, 843010, 8430498020, 8430498010, 8431, 843143, 843149)

 

Oil and gas field machinery and chemicals as well asoil and gas production and exploration services maintain first place among U.S.exports to Russia.  Russia's oilindustry is still burdened by the cash squeeze from last year's low oil pricesand heavy debts, which keeps expenditure on new equipment and services fromrising higher.  Russian managersaccept that structural and technological modernization to maximize efficiencycannot occur without external borrowing, and show a preference for Western-madeequipment over local equipment of generally lower performance.  When servicing and maintenance costsare taken into account it turns out that many lower-priced domestic analoguescan hardly compete.  Russian oilindustry experts anticipates that major oil development projects (in theSakhalin, Tyumen, and Timan-Pechora areas) under Production Sharing Agreement(PSA) terms will proceed during the next 2 - 3 years, providing funds andcatalyzing technological upgrades for industry on a large scale.  Meanwhile, Russia's oil and gastransport giants, Transneft and Gazprom, are also pursuing importantmultimillion-dollar export pipeline projects with clear opportunities for U.S.financial and engineering services.

 

(US$ millions)               1997        1998         1999

                              actual     actual     estimate

 

A. Total Market Size         1,200      1,220       1,270

B. Total Local Production      865        870        900  

C. Total Exports              115         120        150  

D. Total Imports              450         470        520  

E.  TotalImports from U.S.     260        270        300  

 

NOTE: The above figures are based on Russian Customs and U.S. Department ofCommerce data and unofficial estimates. The above table does not include data on Gazprom’s share in equipmentprocurement.

 

**--2. Telecommunications Equipment and Services(TEL, TES)**

** **

The telecom sector provided some of Russia’s bestprospects for U.S. companies. Underlying this is tremendous pent-up demand for service.  Russian telecommunications suffer froma lack of installed lines, outmoded switchgear and inadequate investment.  Only 15 percent of local access linesare digital.  Teledensity (accesslines per capita) is very low (average 19 lines per 100 people compared to 63lines in the U.S.); and seven percent of the population is still on the waitinglist for basic service.  Cellularphone density is 0.3 per hundred (versus 24 per hundred in the U.S.) 

 

Since August 1998, the number of subscribers forcommercial telephone services has grown at an annual rate of 7-10 percent,albeit more slowly than 1997’s 25 percent rate.  In 1998, 8,000 kilometers of frame relay and 7,300kilometers of cable transmission lines were laid, 12 digital exchangesinstalled, 50,000 new lines added in cities and 100,000 in the countryside, and160,000 mobile phone numbers brought on-line.

 

Hard economic times have brought pressure on profitmargins, as commercial operators were forced to cut fees by 10-15 percent, evenas the fees these operators must pay for access to local and long distancelines increased.  Most paging andcellular operators and Internet access providers implemented “anti-crisisprograms” with reduced fees. Telecom firms also face regulatory hurdles including a slow andexpensive equipment certification process; confusing licensing procedures forprovision of services; and inadequate access to the frequency spectrum.

 

Despite a steep drop in investment in the monthsfollowing the crisis, international equipment and services providers are nowseeing renewed demand, particularly in sectors such as wireless applications,and partnerships between Russian and foreign companies are continuing toform.  Since 1997, the Governmenthas been attempting to privatize the existing phone industry through the saleof its national holding company, Svyazinvest, which controls local phonecompanies.   Unfortunately,after the sale of 25 percent in July 1997, the sale of a second 25 percentstake was delayed by the 1998 crisis. Meanwhile, new private companies with international participation aredeveloping facilities and services in expanding city markets and underservedremote areas.  

 

 (US$millions)             1997              1998     1999

                               actual     actual     estimate

 

A. Total Market Size          n/a           n/a     n/a        

B. Total Local Production     n/a            n/a     n/a

C.  TotalExports              114           96      105

D. Total Imports            1,400           1,200     1,220         

E. Total Imports from U.S.     340          290     300

 

NOTE: The above figures are based on Russian Customs and U.S. Department ofCommerce data and unofficial estimates.

 

**--3.  Electric Power Generation Equipment andServices (ELP)**

(HS categories 8411, 8402, 840310, 8412, 8501, 8502,8504,  8535, 8537, 8538, 854460)

 

Russia’s government has attempted with limitedsucccess to introduce competition among power-generating firms through a newsystem of payments for electricity from the national grid.  The national electric power holdingcompany, Unified Energy Systems (UES), continues to face difficulty inincreasing liquidity, by pursuading its customers to pay for electricity incash and on time.  U.S. companiesare focusing their sales efforts on power enterprises on Russia’s periphery,which can generate export revenues, as well as idependent operators such asIrkutskenergo (not affiliated with UES). If individual producers can secure rights to compete on price, to haltservice to non-paying customers, and to retain their earnings, then significantinvestment should follow, with consequent opportunities for U.S. equipmentsuppliers

 

 

(US$millions)               1997       1998     1999

                              actual     actual     estimate

 

A. Total Market Size          n/a       n/a       n/a  

B. Total Local Production     n/a       n/a       n/a  

C. Total Exports               78        89        95   

D. Total Imports             380       450       430  

E. Total Imports from U.S.     90        95       110  

 

NOTE: The above figures are based on Russian Customs and U.S. Department ofCommerce data and unofficial estimates. Due to   widespreadreliance by Russian power-generating enterprises on barter or debt offsets aspayment for capital improvements, estimates are difficult to compile withaccuracy, since barter or offset valuations may not accord with cash marketvalue. 

 

**--4.  Computers, Peripherals and Components(CPT, BUS, ELC)**

** **

Although the Russian computer and peripherals marketwas hit like others by the 1998 financial crisis, it represents a significantmarket for U.S. exporters and has solid potential to grow.  Industry sources estimate the market at$65 million.  U.S. computers andcomponents exports to Russia in 1998 were estimated at $17.3 million.  Currently there is strong demand inRussia for moderately priced PCs with installed Russian-language software;hardware components (sales of locally assembled PCs sales are upsignificantly); high-performance computers; Year 2000 problem solutions; andthe SOHO (small office/home office) market.  U.S. firms dominate markets for printers.  Laptops have found a small niche thatwill grow as small business develops. Overall Russian economic performance along with intellectual propertylaw enforcement will determine the pace of revival of the local market.  

 

(US$ millions)              1997      1998     1999

                        actual     actual     estimate

 

A. Total Market Size          65      72      75

B. Total Local Production     20      25      25

C. Total Exports              5       5       6

D. Total Imports             40      42      43

E. Total Imports from U.S.    35      33      32

 

NOTE: The above figures are based on Russian Customs and U.S. Department ofCommerce data and unofficial estimates.

** **

**--5.  Construction and Mining Equipment (MIN,CON)**

 

(HS categories 8207, 8429, 8430, 8431, 8474)

 

**MiningEquipment: **Westernfinancing is a key for continuing to upgrade profitable orpotentially-profitable Russian coal mines.  Vast opportunities exist in Russia’s quickly developing ore,diamond and precious metal mining. There are good opportunities for long-wall equipment, drag-line buckets,conveyor loaders, and excavators for open-pit as well as mine applications inthe coal and metal mining industries.

 

(US$ millions)                    1997     1998     1999

                               actual     actual   estimate

 

A. Total Market Size              n/a       n/a       n/a  

B. Total Local Production          n/a       n/a       n/a  

C. Total Exports                   78          89        95  

D. Total Imports                   430       450       470  

E. Total Imports from U.S.          170      190       210  

 

NOTE:  The above figures are based on RussianCustoms and U.S. Department of Commerce data and unofficial estimates.

 

**ConstructionEquipment:**  The1998 economic crisis reduced imports of construction equipment by 20 percentand resulted in an average ruble price rise of 55 percent compared to1997.  However, the crisisstimulated sales of domestic construction equipment, which are expected to riseby 8-15 percent, according to various sources.  Depite the cost advantage, the international competitivenessand export potential of the Russian construction equipment industry areextremely low.  Therefore, it islikely that Russia will turn to establishing joint ventures with Westernmanufacturers with a view toward acquiring Western technologies and managementpractices.  This could providesignificant opportunities for U.S. manufacturers of construction equipment.  For now, European (especiallyScandinavian, German and Turkish) companies dominate the Russian constructionequipment and service market.

 

                    1997     1998     1999

                           actual     actual     estimate

 

A. Total Market Size          n/a     n/a     n/a

B. Total Local Production      n/a     n/a     n/a

C. Total Exports             180.3   137.6   n/a

D. Total Imports             709.4   415.2   n/a

E. Total Imports from U.S.    197.8   147.2   n/a

 

NOTE: The above figures are based on Russian Customs and U.S. Department ofCommerce data and unofficial estimates.

** **

**--6.  Autos, Light Trucks and Buses (AUT,APS)**

** **

In recent years Russia’sauto industry has grown at a seven percent annual rate.  However, Russian car factories remainbadly affected by the non-payment crisis, and lack capital for modernization.  In 1998, President Yeltsin issued adecree allowing tax breaks and financial incentives for joint productionprojects in the auto industry which attract a minimum investment of $250million from a foreign partner.  Asa result, major Russian producers began seeking joint ventures to assemblecompetitive cars.  Sales ofimported Western cars totaled 130,000 in 1997.  While the 1998 devaluation seriously undermined sales offoreign models, Renault started a much-publicized joint venture withMoscow-based Moskvich factory; GM has signed an agreement for local productionof Opel with VAZ, a major Russian manufacturer; Ford has agreed on a $150million production investment near St. Petersburg; and other major Westernmanufacturers are at various stages of talks with Russian car plants.  A chief advantage of production inRussia would be immunity from Russian duties, which are a serious impediment toimports.  Still, foreign-built carsremain popular due to quality and design considerations.

 

The most popular productsin the aftermarket area include car security systems, car care products,service equipment, and equipment for pollution control.  With 2.5 million imported cars in use(over half of which are five or more years old), there is steady demand forspare parts.  Given bad weatherconditions, poor roads, and high wear of cars, the demand for anti-corrosionpastes and shock absorbers will continue to rise.  As prices for new imported components are very high, theremay be a growing market for reconditioned parts.  

 

Asthe number of cars in Russian cities increases, authorities have become moreconcerned about the environmental impact. Since 1988, the number of cars in Moscow increased from 600,000 to over2.5 million.  Introduction andobligatory installation of catalytic converters is being discussed as anecessary step.  If and when such arequirement is enacted, opportunities for companies that manufacture catalyticsystems could be huge.  Anotheropportunity comes from the recent decision to convert municipal transport frompetrol to gas fuel.  Thistransition will be gradual but will involve installation of gas fuel systems onnearly 200,000 vehicles.  

 

Overalllow car ownership (110 cars per 1000 residents) forces 85 percent of thepopulation to rely on public transportation --mainly buses, the fleet of whichnumbers nearly 350,000.  With thegradually growing number of small private companies, demand for light trucks,minivans and sport-utility vehicles has grown.  The share of foreign freight companies in the domestictransport market has risen from 25 percent in 1990 to 75 percent in 1998. 

 

US$ millions                1997      1998     1999

                             actual     actual     estimate

 

A. Total Market Size        19,300     17,500     16,200

B. Total Local Production     1.3       1.2       1.2

C. Local Production (tires)   24.7      27.2      30.0

D. Total Exports             133.9      118.9     n/a

E. Total Imports             900.0     1,250     n/a

F. Total Imports from U.S     34.0        29.0           n/a                           

NOTE:  The above figures are based on RussianCustoms and U.S. Department of Commerce data and unofficial estimates.  Significant numbers of cars areimported into Russia bypassing customs, thus making precise estimatesproblematic.

** **

**--7.  Aircraft and Airport Equipment (AIR,APG)**

** **

Demand foraviation products and services has stabilized in Russia, and many American companiesare working with Russian partners on joint projects ranging from supply offasteners and avionics to joint production of jet engines.  In 1998, Russia ranked 14th in theworld for U.S. aerospace exports. Russian airspace is now increasingly available to foreign airlines asRussia upgrades its air traffic control systems.  

 

A 30 percenttariff makes importing aircraft prohibitive unless a tariff waiver isgranted.  The Government adopted adecree “On Additional Measures for State Support of Russian Civil Aviation”which links tariff waivers for Russian airlines’ purchases of foreign aircraftto these airlines’ purchase of Russian planes.  A recent decree subordinating the aviation industry to theRussian Space Agency is also seen as an attempt to spur production by creatingconsolidated design and production centers.  

 

In the nextdecade, however, there seem few alternatives to large purchases of importedcommercial aircraft by Russian airlines, despite the likelihood that theIlyushin-96 aircraft will move into production, now that it has received FAAcertification.  In 1998, Russia hadjust over 8,000 registeded civil aircraft, but many are aging.  To satisfy internal demand the Russianaviation industry must produce and/or import approximately 30-40 aircraftannually.  

 

Demand for airportequipment continues to be steady, and should greatly benefit from prospectivelegal changes in property rights and taxation.  A Federal program on upgrading major airports offerscommercial opportunities to U.S. firms, especially in the field of constructionand airport security.  Russianairports are gradually realizing the necessity of supplementing theirtake-off/landing fees with revenues from commercial use of airportfacilities.  This, in turn, offersgood opportunities for U.S. service-oriented firms.

 

US$ millions)              1997         1998     1999

                               actual     actual     estimate

                                 

A. Total Market Size        1,300        1,100      1,000

B. Total Local Production      18         7         12

  (large civilian aircraft)

C. Total Exports               550       500        n/a

D. Total Imports               314       350        n/a

E. Total Imports from U.S.      37        45       n/a

#  

# NOTE:  Theabove figures are based on Russian Customs and U.S. Department of Commerce dataand unofficial estimates. Significant discrepancies exist between U.S. andRussian aircraft trade data, mainly due to differing treatment of leasedplanes, which Russian data do not count as imports.

#  

**--8.  Agricultural Machinery (AGM)**

** **

Russia’s need for farmmachinery is potentially very large, but real demand is depressed by the weakfinancial condition of Russia’s farm sector.  Russia now produces less than half as much farm equipment asin 1992, and imports are estimated to have fallen by almost two-thirds in1998.  Equipment shortages are nowthreatening overall agriculture production levels, according to the U.S.Agriculture Department.  In spring1999, the agroindustrial complex was short 627,000 tractors, 913,000 trucks,11,000 seeders, 6,400 tractor plows, 7,000 cultivators, and 1,400 disk harrows,according to an authoritative Russian industry association.  For the 1999 harvest, one surveypredicts a shortage of 160,000 (40%) in combine harvesters. 

 

Despite these needs,effective demand for domestic or imported farm machinery will be limited unlessnew sources of financing are found. Some import sales will be made to the few solvent buyers available or tothose who receive help from regional governments.  Large sales, however, will probably be possible only forsellers able to provide financing and support systems for purchasers that gosubstantially beyond simple direct sales, or who are willing to accept barterpayments.  Some major U.S.companies have proposed comprehensive equipment, financing and serviceprojects, which could dramatically increase farm machinery imports toRussia.  However, these companieswill only be able to implement small pilot projects, unless large export creditguarantees are available from such sources as the U.S. Export-Import Bank.  

 

Sales to specialized andmarket agriculture companies may also provide some opportunities wherefinancially healthy Russian companies are trying to expand to satisfy greaterlocal demand spurred by higher prices of imported food.  For example, increased sales may bepossible in the areas of greenhouse equipment and swine and poultry production.

  

(US$ millions)              1997      1998     1999

                               actual     actual     estimate

 

A.Total Market              282          165        178

B.Total Local Production     117           70       80   

C.Total Exports             16            10       12

D.Total Import              181          105        110

E.Total Imports from U.S.    21           19       20   

** **

NOTE: The above figures are based on Russian Customs and U.S. Department ofCommerce data and unofficial estimates.****

** **

**--9.  Medical Equipment and Pharmaceuticals(MED, DRG, DNT)**

** **

**Pharmaceuticals:**The 1998 ruble depreciation led to a 4-foldincrease in prices of imported pharmaceuticals.  Despite this, imports continued to occupy 58% of Russia’sdrug market in 1998 (compared to 60% in 1997).  After the crisis, prices for locally producedpharmaceuticals only doubled, but local production was stagnant.  In 1998, most pharmaceutical importscame from Western Europe (over 60%), Eastern Europe (27%), and Asia (8%).  The U.S. share of Russia’s drug importsranged from 1.5% to 7% in 1998.  In1999 so far, the market has been shrinking, and by year’s end it may reach onlyhalf of 1998 sales.  Nevertheless,few major Western companies have left the market, and most expect the situationto improve in the mid- and long-term. Several U.S. pharmaceutical firms, (e.g., Bristol-Myers Squibb,SmithKline Beecham) have successful joint venture production facilities inRussia.  ICN has bought five localplants and is now in the top ten of Russian-based pharmaceuticalproducers.  Pharmaceuticalmanufacturers such as Pfizer, Eli Lilly, SmithKline Beecham, Schering-Ploughand Wyeth-Lederle remain major exporters to Russia.  Top prospects include insulins, cardiovascular drugs,hormonal drugs, antibiotics, analgesics, vitamins, and psychotropic drugs. 

 

(US$ millions)              1997      1998     1999

                               actual     actual     estimate

 

A. Total market              3,300     2,700     1,800

B. Total Local Production     1,270     1,120       940 

C. Total Exports                77      64        40 

D. Total Imports              2,078     1,644       900

E. Total Imports from U.S.     32       27        20

 

NOTE: The above figures are based on Russian Customs and U.S. Department ofCommerce data and unofficial estimates.****

 

**MedicalEquipment:** Russia’s medical device market is estimated at $600million for 1999.  In 1998, localproduction supplied only 24% of the total market.  This is expected to pick up slightly in the next two years,but imports will continue to be significant.  Financing is a hurdle for most foreign medical device frmsselling in Russia.  In previousyears, regional governments sought high-tech capital equipment to modernizelocal hospitals; but in 1999, with further cuts in federal and local healthcarebudgets, such purchases have been reduced.  However, hospitals continue to buy smaller devices andsupplies in significant quantities. World Bank loans are financing some hospital modernizations.  Subsectors such as dental equipment andsupplies are highly dependent on imports, as local products cover only 20% ofdemand.  Best potential for salesis in clinical lab equipment and test kits, dental equipment and supplies, andequipment for diagnostic imaging, radiology, instrument sterilization, and homehealth care.

 

(US$ millions)              1997      1998     1999

                               actual     actual     estimate

 

A. Total market              1,038     800       600

B. Total Local Production      270     228       200     

C. Total Exports                19     18        10     

D. Total Imports               787     590      410      

E. Total Imports from U.S.     100     60     50     

 

NOTE: The above figures are based on Russian Customs and U.S. Department of Commercedata and unofficial estimates.****

 

**--10.Food Processing and Packaging Equipment (FPP, PKG)**

** **

A decline in foodimports is stimulating production by Russian food companies, who are in turnupgrading or expanding their facilities. This appears to be driving demand for all ranges of food processing andpackaging equipment, including both small-scale, inexpensive machines forfarmers, local processors, food wholesalers and supermarkets as well as moresophisticated high-tech equipment for large food processors. Although somedemand is driven by new investments of Western food firms in Russian facilities(e.g., Pepsico, McDonald’s, Mars/Masterfoods, Nestle, Coca-Cola, Wrigley and others), Russian firmsare also replacing aged machinery and equipment to improve production andcompetitiveness.  In spite of thecrisis, most foreign machinery suppliers stayed in the market as evidenced byparticipation at Russian trade exhibitions. Promising subsectors include milling,refining, extracting, and canning equipment, cold-storage and transportationequipment, and machinery to produce baby food, dairy and meat products, frozenfoods, soft drinks and beer.

 

(US$ millions)                  1997      1998     1999

                               actual     actual     estimate

 

A. Total Market Size            697         405      480

B. Total Local Production         110         93     100        

C. Total Exports                 34           8       10

D. Total Imports                 621        320      390

E. Total Imports from U.S.         33         14       14

 

NOTE: The above figures are based on Russian Customs and U.S. Department ofCommerce data and unofficial estimates.

 

**--11.Cosmetics and Beauty Products (COS)**

** **

Industry sources see substantial potential for U.S.cosmetic products in the Russian market. 1998 imports of  perfumeryand cosmetics from the U.S. were estimated at $22 million.  Russia’s retail health and beautyproducts market is estimated at up to $3 billion.  Since mid-1998, imports have slowed and domestic firms’market share has been increasing.  

 

In the retail hair and skin care products market,competition is tight: the quality of local hair care products is now comparableto foreign brands, and domestic skin care products are much-improved, thoughnot on a par.  Locally-mademake-up, on the other hand, is low and cannot compete in terms of quality with well-knownforeign labels.  In any case, toproduce quality products, local manufacturers must import certain ingredientsunavailable in Russia in sufficient quality or volume.  Equipment for the cosmetic industryalso has to be imported, as there are no manufacturers in Russia.  Another major need is packaging -- mostcosmetics packaging today is imported from Italy, Germany and Poland.  U.S. companies selling these productsmay find success in Russia.  

 

The beauty service industry (hairdresser shops, beautysalons, etc.), also presents opportunities for U.S. companies.  Russia’s professional beauty market hasbecome larger and more sophisticated during last 5-6 years, as reflected in thenumber of salons opened and in higher quality of equipment installed, moremodern salon design, better-trained personnel, and broader use of exclusivebrands.  Despite the crisis,professional beauty operators are continuing to develop strongly, relyingalmost exclusively on imported cosmetics. American professional hair, skin and nail care products, and equipmenthave good prospects on the market, and professionals in Russia are interestednow in getting more information about American-manufactured beautyproducts.  

 

(US$ millions)               1997     1998     1999

                              actual     actual     estimate

 

A.  Total Market Size          3100      2500       2400

B.  Total Local Production     n/a        n/a       n/a

C.  Total Exports             32.4       19,4       n/a

D.  Total Imports             636.2      459.1       400.0

E.  Total Imports from U.S.    35.6      22.1         20.0

 

NOTE:  The above figures are based on RussianCustoms and U.S. Department of Commerce data and unofficial estimates.

 

 

## Agricultural BestProspects

 

In fiscal year 1998, U.S. food and agriculturalexports to Russia topped $1.1 billion despite the drop in exports after theAugust 1998 crisis.  In the aftermath of the rubledepreciation U.S. exports of food products to Russia were down nearly 80percent (to $137 million) in the October 1998 – March 1999 period compared withthe same 6-month period in 1997-1998($647 million).  We believethe following  product groupings orproducts retain the best market potential based on Russian import and consumerbuying trends: poultry, beef, pork, fresh fruits and vegetables, processed (anddried) fruits and vegetables, fish and seafood items, instant soups, wheat andwheat flour, soybeans and soymeal, animal feeds, tree nuts and pet foods.  These U.S. products have done well inthe Russian market in the past and have met with acceptance by bothintermediate processors and Russian consumers.     

 

Financial and creditconsiderations are of paramount importance, as is the fundamental need tocarefully assess the capability of the Russian importer to purchase anddistribute product.  “Duediligence” will take on added significance as U.S. exporters seek to resumetrade and commercial relations with their Russian counterparts.  Thepurchase by the Russian government of 1.5 million tons of commodities and meatproducts with P.L. 480, Title 1, credit under the auspices of the U.S. FoodAssistance Package will result in significant increases in the export of thosebulk commodities which had declined dramatically since the early 1990s.

 

One outcome of the economic crisis hasbeen a growing interest in domestic production and products on the part of someRussian food importers and distributors. This, in turn, has led to resumption of processing at once-idle Russianplants, and increases in output at other processing facilities.  As Russian product has become morecompetitive, primarily due to a much devalued ruble, this tendency is likely tocontinue with a resulting negative impact on the sales of certain U.S.processed food items in the Russian market.

** **

**--1.  Corn (Feed)**

** **

The slowly recovering poultry andlivestock industries will require quality feed if the Russian producers are tocompete with the quality of Western imported products.  The current dominant market shareenjoyed by U.S. exporters should be the basis for continued expansion of U.S.feed grain exports, particularly in the Russian Far East or other regionalmarkets.  If restored, increasedutilization of GSM or other USDA credit facilities could improve access tocredit for Russian buyers and support expanded U.S. exports. 

** **

(US$ millions)               1997     1998     1999

                              actual     actual     estimate

 

A. Total Market Size         2,920        895      2,020

B. Total Local Production    2,670        820      1,500

C. Total Exports                0          5          0

D. Total Imports              250         80        520

E. Imports From U.S.          120          1        520****

 

NOTE: The above figures are based on Russian Customs and U.S. Department ofAgriculture data and unofficial estimates.

 

**--2.  Poultry**

** **

U.S. poultry has the major share ofRussia’s import poultry market at 78%. Although U.S. poultry exports have grown at record levels, a number offactors will negatively impact the rate of growth that U.S. exporters havebenefitted from in recent years. Most significantly, the economic crisis in Russia dramatically curbedconsumer spending.  Secondly, theRussian government has shown interest in measures to protect and encouragedomestic poultry production (as evidenced when poultry was excluded from a listof agricultural products for which Russia lowered import tariffs in October1998).****

 

(US$ millions)               1997     1998     1999

                              actual     actual     estimate

 

A.  Total Market Size       1870     1460     1220                       

B. Total Local Production    630       640     720 

C. Total Exports             15         15        15                 

D. Total Imports            1240      820     500          

E. Imports From The U.S.     950       640       375

 

NOTE: The above figures are based on Russian Customs and U.S. Department ofAgriculture data and unofficial estimates.

 

 

**--3.  Pork**

 

U.S. porkexports continue to do well despite stringent Russian certificationrequirements.  The current EU foodaid package includes 100 thousand tons of pork products which may hinder U.S.export opportunities.  However,under normal trade conditions, the high cost of EU product makes U.S. productmore competitive despite longer transit time for deliveries.  The combination of the current economiccrisis, lower consumer spending, and measures taken by the GOR to encouragemore domestic processing mean that the best export opportunities in 1999 willmainly consist of unprocessed and semi-processed items for furtherprocessing.  Fresh pork marketsales will be targeted to retail stores, restaurants, hotels and other foodservice providers.  Cancellation ofthe GSM 102 and lack of a Supplier Credit program will put U.S. exporters at adisadvantage when U.S. pork prices are high.  Pork sales should be targeted to major cities and regionswhere incomes are high and where there is greater market diversification,especially in light of the current economic situation.

          

(US$ millions)               1997     1998     1999

                              actual     actual     estimate

 

A. Total Market Size         2014      1810     1735

B. Total Local Production     1570     1510     1385

C. Total Exports                1         1         1

D. Total Imports              450       300       350

E. Imports From the U.S.40     60        80

 

NOTE: The above figures are based on Russian Customs and U.S. Department ofAgriculture data and unofficial estimates.

 

**--4.  Wheat Flour**

** **

Rising demand in the Russian FarEast should boost U.S. wheat exports. The RFE will be an especially strong market for wheat flour because itlacks both crop acreage and milling capacity and because of its relativeproximity to America. U.S. wheat flour exports should grow at 3%, slightlyabove the total growth rate for all Russian wheat flour imports.  The projected value of U.S. exports in2002 is $9.0 million. 

** **

(US$ millions)               1997     1998     1999

                    actual     actual     estimate

 

A. Total Market Size        11,235     11,320      11,230

B. Total Local Production   10,900     11,200      11,300

C. Total Exports               55         95        120

D. Total Imports               390       215          50

E. Imports From U.S.             40        20          20

 

NOTE: The above figures are based on Russian Customs and U.S. Department ofAgriculture data and unofficial estimates.

 

 

**--5.  Beef              **

** **

The U.S. share of the Russianbeef import market is 10.0 percent. U.S. imports of processed meat products have grown steadily in theRussian marketplace.   Incontrast, the market position of unprocessed and semi-processed product appearsto be worsening, declining from 1.6 percent in 1997 to  0.31 percent in 1998.  The EU food aid package includes 150thousand tons of beef that may serve as a market hindrance for U.S. exports.  However, with concerns about thequality of European beef, the high image that U.S. beef enjoys provides astrategic opportunity for U.S. beef exporters to increase market share in thelong term.  The major supplier ofbeef is Ukraine with more than three-fourths of the market.  It is possible that the economic crisiswill increase opportunity for the import of meats for further processing, asnormal trade patterns have been disrupted.  Strategic marketing will help maintain current market sharein 1999; and opportunity for long term growth of U.S. meat exports to Russiaexists.  With increased awarenesson the part of U.S. exporters and Russian importers, U.S. market share isprojected be maintained in 1999, and grow by 10% annually to 2003.

** **

(US$ millions)               1997     1998     1999

                              actual     actual     estimate

 

A. Total Market Size          2900     2500       2310     

B. Total Local Production     2260     2090       1910     

C. Total Exports                5         5         5         

D. Total Imports              660       410       400

E. Imports From U.S.            6         7         6

 

NOTE: The above figures are based on Russian Customs and U.S. Department ofAgriculture data and unofficial estimates.

 

**--6.  Seafood**

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The Russian import market for seafoodexpanded rapidly until the 1998 economic crisis.  Based on 1996-1997 Russian Customs data, the projectedgrowth from all suppliers was 60%. The U.S. market share is negligible, mostly fresh, chilled or frozenfish.  Despite lower consumerspending in Russia, expensive fish items are marketed to hotels, restaurants,and supermarkets targeting foreigners and wealthy Russians who 1) can stillafford these items; and 2) prefer high quality imported fish products.   Most U.S. product in themarketplace is of high quality and very expensive.  When normal trade patterns resume, there could besignificant growth for a range of processed seafood products including canned,pickled, bottled or smoked items. There is little product in the low to mid-price range that offers growthpotential for U.S. exporters. Canned products are especially popular in Russia as they provide longershelf-life and are easier to handle and store.  In recent years, U.S. processed crabs and crab meat haveappeared in Russia and have done quite well.  French and Scandinavian firms have large market shares, awide and interesting assortment of products, and aggressive marketing.****

 

(US$ millions)                  1997     1998     1999

                               actual     actual     estimate

                         

X. Landing/Comm’l Catch          4400     4200     4300

A. Total Market Size            3850     3600     3400     

B. Total Local Production        3200     3200     3100

C. Total Exports                2300     2500     2500

D. Total Imports                 615      400      340

E. Imports From U.S.               5        4        5

 

NOTE: The above figures are based on Russian Customs and U.S. Department ofAgriculture data and unofficial estimates.

 

** **