Russian Market

The Russian Market or the World Trade

0 comments

Have you considered the price we’ll have to pay to return to the Russian market?

That politicians often commit the sin of selling dreams as reality is nothing new. While this occurs over many issues in Georgia, in this article I want to focus on our export potential in agriculture. The aim is to confirm that, in spite of arguments made by the new government, the Russian market is not a panacea and that our entrepreneurs may successfully sell high-quality and low-priced products to any region of the world.

Several arguments have been made concerning why Georgia should re-establish links with the Russian market. This article will examine each of these in turn to highlight how unfounded they are.

Argument No. 1:

According to popular opinion, the politically motivated economic embargo Russia declared against our products in 2006 dealt a heavy blow to Georgia.

In contrast, in 2007, Georgia’s economy showed its highest growth of the past decade – 12 percent. More importantly, everything suggested that this growth would continue in 2008. That, perhaps, became one of the reasons/aims of the Russia-Georgia war in August 2008 – indeed, had the economy of Georgia stopped growing thereafter, the Russian political elite may have considered its mission completed. Among the other real causes of that war, one may also consider the fact that after 2006 Georgia refused to purchase Russian natural gas, thereby depriving Russia of this lever for blackmail. The existence of such reasons, at least indirectly, proves that the war with Russia was inevitable.

Argument No. 2:

Russian consumers are nostalgic about Georgian products. This argument tends to assume that Russian consumers are just fanatics who merely stick to what they know.

If we take the example of wine imports, this argument has been proved to be untrue. It must be noted that Russia is not a world leader in wine imports. Even though its market is large – 800 million bottles per year, it is half the size of the market of China and five times smaller than that of the United States. The case of China is the most extraordinary – reaching such volumes after a mere 30-year history of importing wine. The production of wine in China, which never even existed some three decades ago, even exceeds the volume of wine imported (the same holds true for Russia). It is also worth noting that while wine production and consumption in China has been increasing at a very high rate, Russia has shown a three to four times decrease over the past decade (Eleonora Scholes, An Insight into the Russian Wine Market, 2011).

It seems that Russians entertained their nostalgia towards Georgian products until the 2000s (although this could have been a result of propaganda rather than nostalgia), following which wines from countries of the former Eastern Bloc rapidly gave way to those from countries of Western Europe and the Southern hemisphere. According to the study, An Insight into the Russian Wine Market, the share of nostalgic (or propagandist) wine imports stood at 90% in 2000, but plummeted to 34% in 2010, whereas the share of Western European (Italy, France and Spain) and Southern hemisphere (Chile, Australia and Argentina) wine imports to Russia increased to 66%. By 2010, traditional Moldovan wine imports to Russia stood at a mere 3%, or some eight million liters. The change in the geography of wine imports to Russia over the period between 2000 and 2010 can be seen from the chart below:

Argument No. 3:

our wine is better/more preferred.

People use such argument to either mislead others or because they are really ignorant of what they are talking about. No one is arguing that there are good Georgian wines. But such wines are not widely available or are so expensive that an ordinary customer cannot afford them. As the years have gone by, even Georgians are losing their feeling of nostalgia for Georgian wine. For example, Georgians living in Brooklyn, New York, who have discovered excellent cheap French and Italian wines, no longer ask their relatives in Georgia to send them Georgian wine. We must also admit that whenever we are presented with a bottle of Georgian wine, we often look at it with uncertainty, wondering what quality it holds.

It would come as no surprise to anyone that quality and price counts for Russian consumers as well. It will be difficult for us to compete with Chilean wines in the low-price (from 2 to 4 USD a bottle) fresh grape wine segment of the market. Our return to the counterfeit wine and fruit (other than grape) wine segments of the market is less likely because first, other countries already meet this demand and second, it makes no sense to do so as Russia produces such products itself. I hope we do not entertain any illusion about success in the expensive wine segment either – if people are able to pay so much, why would they not buy expensive French wine instead?

It is also true that Russian consumers are susceptible to propaganda (they perhaps still believe that Georgia is Russia’s number one enemy). But it is not clear what impact this will have on the geography of wine imports. Such propaganda only serves the aim of misleading people and provides Russian politicians and bureaucrats with a lever which they will again use to appease us now and make us bleed later.

Cheap French wines have also appeared in Georgia and so far I have not heard anyone complaining about their quality.

Argument No. 4:

French (Italian, Australian and the like) wine production is subsidized. This means that Georgian wines are at a competitive disadvantage from the very start. Consequently, the line of reasoning goes, we also need to start subsidizing wine production.

This argument is poor in several ways:

1. It is a problem of the French people that they draw upon their own budget to enable foreigners to buy their wines at cheaper prices.

2. The French are, by the most recent data, 10 times better-off than Georgians and can thus “afford” to waste this money (though recent events increasingly show that this might no longer be the case).

3. As a poor country, Georgia does not have excess resources to waste on subsidies.

4. Any subsidy is paid by us, the Georgian taxpayers.

5. Money paid in subsidy of one sector decreases the money available for other more successful unsubsidized sectors, thus curbing their chances to expand and employ more people.

Argument No. 5:

a typical Russian consumes a lot of wine.

This argument is not borne out by statistics. Quite the contrary, according to the World Health Organization and Wikipedia, the typical Russian consumes very little wine. According to Eleonora Scholes’s above cited study, the average amount consumed is seven liters a year, half that of the amount of vodka and 14 times lower than the volume of beer consumed. According to the same study, Russia has 30 million wine consumers whereas, for example, the less populous Great Britain has 33 million. Another interesting piece of information provided in this study is that, according data of the Bloomberg Businessweek weekly, Russia is not amongst the top 10 countries in terms of the number of millionaire households.

Many will perhaps remind me that Russia is not only a wine market and that we should not ignore fruit and mineral water exports. Let’s thus look at these market segments in both Russia and the rest of the world.

Let’s take, for example, apples. In 2010 the world production of apples, according to Russian Wikipedia, stood at 70 million tons. Georgia is not among the top 50 countries that produce more than 100,000 tons of this agricultural commodity. According to the data of the National Statistics Office of Georgia, the production of all sorts of fruit grown in Georgia totaled 187,000 tons in 2011.

According to the official data of the United States Department of Agriculture (USDA), in 2010, Russia consumed 2.1 million tons of apples (800,000 tons were used in food processing), of which 1 million tons were locally produced. Its import of apples from countries of the Commonwealth of Independent States (CIS) comprised 20% of total apple imports in 2011. Total Russian imports of apples in 2011 stood at 1.1 million tons and cost 0.7 billion USD, with the average CIF (cost, insurance, and freight) price ranging between 0.65 and 0.7 USD per kilogram. The stable increase in the share of apple imports from the Southern hemisphere to Russia (36% in 2011) is also worth noting (USDA Foreign Agricultural Service GAIN Report, “Russian Federation, Fresh Deciduous Fruit Annual”, October 2011).

Russia is one of the world’s largest importers of apples; in terms of apple production, it is ranked 10th between Chile and Brazil. The top producer is (of course) China, producing 33 times more apples than Russia (China’s population is ten times higher than that of Russia) and it is China that supplies the majority of cheap apples to Russia. The trends in the world apple supply can be seen from the table below:

Apple supply in 2009, tons;

(Food and Agriculture Organization)

China 22,154,225

USA 7,449,887

Russia 2,855,023

United Kingdom 1,718,960

Germany 1,713,762

India 1,698,181

 

Price counts for more in case of apples than wine because of the significant differences between the two in terms of the conditions and costs of storage. Moreover, due attention must be paid to the fact that the difficulties of entering a low price segment of the market does not mean that it is any easier to enter a higher price segment. Apples costing 1.5 USD per kilogram (the equivalent to 2.5 GEL) at a border must be of competitive quality and appropriately packaged. Here a question arises: if it is possible to supply Georgian apples at the border with Russia at this price, why is it not possible to supply them to Georgian supermarkets, where imported apples costing between 2 to 6 GEL per kilogram prevail?

Tangerines, according to the above cited USDA report, are a very popular fruit in Russia. However, they fall short of the popularity of apples and bananas and almost equal that of oranges.

Tangerines are imported to Russia from all over the world, with the largest suppliers being Turkey (one fourth of all imported tangerines), Pakistan (one eighth) and China (one tenth), with African countries, Argentina, Spain and others trailing these figures. According to the same report, the CIF price for tangerines is around 1 USD per kilogram, which leaves some chance for Georgian producers to export. However, provided that the same standards of supply and quality, as managed by the above listed countries, are observed, it is very unlikely that large amounts of tangerines will be supplied to Russia at that price (it is difficult to buy quality tangerines at that price even on the wholesale market in Tbilisi). Supply of tangerines requires qualified management, which is difficult for small businesses to afford.

The USDA report also shows a lower price of oranges both at the border and in the retail market segment of Russia.

World citrus fruits production in 2007, according to information published on Wikipedia (which, in turn, relies on the data of the Food and Agriculture Organization of the United Nations, or FAO) totaled 115 million tons, including 63 million tons of oranges (55%) and 26 million tons of tangerines (22%). The same information shows that Russia’s consumption of tangerines comprises a mere 2.5% of world production. In other words, there are other markets which account for 97.5% of production and consume a little less than 26 million tons of tangerines. The table below reflects the supply of citrus fruits to separate countries:

Citrus (tangerine and orange) fruit supply in 2009, tons; (FAO)

Country - Tons

China 13,506,314

USA 9,338,026

India 4,678,265

France 3,017,387

United Kingdom 2,547,228

Russia 1,149,210

Germany 900,006

 

According to the National Statistics Office of Georgia, our production of citrus fruits has ranged between 50,000 and 100,000 tons per year over the past few years, which accounts for 0.08% of the world’s total production. Potential exporters of citrus fruit to Russia should also take into account that even such a large player in this market segment as the United States (10 million tons a year) has found it quite difficult to become established in the Russian market; its share in that market is insignificant, comprising only 2,000 tons.

This does not necessarily imply that Georgian tangerines have no chance to get onto the Russian market. The USDA report shows that tangerines are supplied to Russia by Azerbaijan and even self-declared Abkhazia. There is no doubt that poor quality tangerines can also be sold somewhere in the vast territory of Russia (that is also noted by the USDA report). But the amount of effort it would take to overcome Russian bureaucratic barriers to ensure a stable supply of low quality tangerines is easy to imagine. All that, however, leads to one question – why Russia specifically? If a commodity is of good quality and cheap, it can be sold anywhere. Our main concern must thus be quality and price in the agricultural or any other sector.

But before jumping to conclusions, we’d better wait and look into yet another sector – mineral water.

The first thing that an observant Georgian customer must have spotted is the appearance of imported bottled water in Georgia. It must not have been easy for a foreign producer to enter the Georgia market that is saturated with locally produced bottled drinking water,

even though the soft drinks segment of the market has seen various products imported for quite some time now (for example, Coca-Cola). Whilst a large-scale influx of imported mineral water may currently seem unimaginable in Georgia, this could swiftly become a reality in the foreseeable future, just as has happened in other traditional sectors – apples, vegetables, wine.

Let’s now analyze the mineral (bottled) water market. One should say outright that this sector is one of most confusing ones. For example, a special information portal on mineral waters, www.mineralwaters.org, already lists more than 4,000 registered brands, including 11 Georgian, 622 German, 607 Italian, 381 Russian, 217 French, 195 American, 172 Spanish, 159 British and many other brands. Mineral waters starkly differ from one another in their composition, thereby significantly affecting their consumption (especially, when it comes to palate). Consumption of mineral waters (including so-called non-aerated mineral waters) also depends on climatic conditions and the current weather and it is therefore difficult to outline a clear tendency.

After reading a host of information, one thing that seems conspicuous is that Russian citizens are not great consumers of bottled water. Russia does not make it into the world’s top 20 countries by per capita consumption of this product. According to a report on bottled water conducted by the Beverage Marketing Corporation in 2009, the largest consumer of bottled water is the United States, which consumed 32 billion liters of bottled water in 2009 (followed by Mexico, China, Brazil and Italy). Of this volume, 1 billion liters were mineral waters. Russia is not among the top 10 countries. The total world consumption of bottle water is almost 200 billion liters. According to this information, the average American consumes approximately 100 liters of bottled water per year, putting him or her in tenth place worldwide, with Mexico being first with 235 liters per person, Italy second with 190 liters and the United Arab Emirates third with 155 liters (I personally know an Azerbaijani businessman who sells Georgian bottled water in the latter country).

In contrast, a survey conducted by the Intesco Research Group provides the following data on the consumption of bottled water in Russia in 2010:

- Total consumption was 4.36 billion liters (of all types of bottled water). Consequently we may estimate that the consumption of mineral and other bottled waters per person in Russia does not exceed 35 liters a year (compare this with the indicators listed above);

- The share of imports stood at 0.2%, of which 33 million liters (40%) was accounted for by France;

- Production has grown fast, by approximately 15% annually in the past few years (except for 2009);

- The five largest producers capture 35% of the market;

- The average wholesale price of 1,000 half-liter bottles was 3,800 Russian rubles, which is the equivalent to 190 GEL (that is 0.19 GEL per bottle);

- The highest wholesale price was 0.29 GEL per half-liter bottle.

- The average retail price per bottle was 23 Russian rubles (almost 1 GEL), though in some locations such as Chukotka, Murmansk and Moscow it even reached 3 GEL;

- It is also noteworthy that the wholesale price of high-end foreign brands (Evian, Perrier and others) reached up to 100 Russian rubles (almost 5 GEL) in those locations, while the border cost was 27 rubles (or 1.3 GEL).

Russia is thus not a world leader in consuming bottled water; its consumption is less than 2.5%. Nor is Russia among the countries with the highest purchasing capacity, with average nominal salaries standing at 810 USD per month (Wikipedia, 2011). Compared to Russia, the average nominal monthly salary in the United States (which is the largest consumer of bottled water) is 3,500 USD, four times higher, its population is twice as large and the total sales of bottled water is 7 or 8 times higher.

Let’s now raise a general question: what should we expect from the Russian market? As we have seen above, those segments of the Russian market which are most topical for us, do not show many prospects. These segments are oversaturated and competitive. Moreover, if we look at our export statistics over the past 10 years and pick out the most successful years by each product, we can see that it reaches only 160 million USD, a mere 1% of our Gross Domestic Product. Increasing this indicator by an additional 1% may give some relief to Georgia, but it can hardly be called a panacea. Moreover, we should consider what an increase in exports to Russia will cost Georgia and its population. It is also a fact that while Georgian exports have increased fivefold over the past decade, there has been no increase in the export of the topical products listed above (except for water), which provides an undeniable indicator of the inefficiency and uncompetitiveness of the commodities in these sectors. This can be seen from the table below:

 

This reasoning will inevitably lead us to two important issues: first, whether or not the Russian market is important for the Georgian economy, and second, whether or not agricultural production is a strategic field for the Georgian economy.

The Russian market is interesting, but it is not the only, or even the best, one available. This fact is seen in each of those market segments that the Georgian people, confused by the propaganda of the current government, are pinning their hopes on. Russia is not a leader in either total or per capita consumption of agricultural produce. There are, of course, other potential consumers. The volume and share of agricultural imports of five countries looks like this:

Those people who are engaged in propagating our prospects in the Russian market either have no idea about the tendencies of world trade or think that Russian consumers can be politically bribed into buying Georgian commodities alone. This method is not new. It has been repeatedly tried by Georgians as well as others with no result. In any case, even if the Russian government instructs its citizens to buy low quality products at high prices, by doing so we will be walking into the same trap that we were caught in for 200 years – the trap of dependence on Russia.

If our products are of high quality, should we so crave to sell them in Russia specifically? Are not the populations of America, the European Union, Japan, Australia, Canada, the Arab countries, South Korea and many others much better-off than that of Russia? There is also China, which is already the second largest economy in the world.

I cannot finish this article without saying some words about our new government’s plan to pump huge resources into the agriculture sector. This is the wrong decision. This matter has been discussed many times before, and rather than repeat all of the arguments, I want to raise just a few very important issues. Channeling resources towards the agriculture sector will:

1. Decrease the resources available for other sectors which, according to our export statistics, are more successful than agriculture;

2. Mean impeding the development of these successful sectors, thus limiting their possibilities to employ more people;

. Undermine the possibility of Georgia’s further urbanization, which means that rural areas will still retain an excess population each owning fragmented parcels of land so small in size that they are unable to use them for little more than subsistence.

Fragmentation of land itself creates the problem of inefficiency and high pricing, hence the undesirability of cultivating such areas – a hectare of land can hardly yield sufficient crops to sustain an average family over a year…

With the current level of fragmented lands, investments into the agricultural sector will result in costly products which would require additional spending – subsidies (paid from our own pockets) – to be delivered to consumers. If anyone is really concerned about economic growth and employment, the correct path will be a radical downsizing of taxes and public spending, thus providing the private sector with the possibilities to decide for itself which sector is more profitable in producing quality goods to compete with rivals in the world market…

Yet another difficulty in trade with Russia is, and will continue to be, its tariff policy – a strong lever in the hands of the Russian government. Clearly, we must not expect that the Russian government will grant Georgian suppliers the same privileges of free trade that CIS countries enjoy. What those countries sacrifice in order to enjoy these privileges is also widely known. We must therefore also question whether it is worth asking for these privileges from the Russian government and what gaining these will cost us. In any such deal, I think that apart from facing such obligations as, for example, having purchase Russian manufactured cars, we will again fall under the illusion that the Russian market is irreplaceable; will again go astray from the world market; will again fall into that same trap that we so painfully freed ourselves from during the 1990s. One should also take into account that the trade relations of any country with Russia are complicated, no matter how submissive that country is to Russia’s will. The admittance of Russia into the World Trade Organization was an attempt to contain the complicated relationship with Russia in an institutional framework, which, as experience has proved, is quite illusory – Russia clearly intends to use this for its benefit.

The Russian government has long-term interests in the Caucasus region. These interests do not imply an independent, peaceful and prosperous Caucasus. It has made mistakes in the region that it tries to correct through violence, not friendship. It desire for subordination, not cooperation.

If we fail to take into account all of this, the Georgian government will become politically dependent on Russia. Experience shows that the only way a country can stand up to these manipulations is to have its own solid, independent position which it will defend rather than humiliate itself by begging for privileges in the corridors of the Kremlin. Having our own solid, independent position, however, means that we need to work harder to both produce goods of a quality and price conforming to the world market and to diversify our markets.

Comments

Log in or Register