The reality of the Russian market Sharp rise in import volumes, but more importantly, a slide from reprocessed products towards paste

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1 The reality of the Russian market Sharp rise in import volumes, but more importantly, a slide from reprocessed products towards paste Russia, previously of the Soviet Republic, stretches over more than 17 million square kilometres, which is about 1.8 times the size of the USA. It is home to 142 million people. According to information presented at the Toronto Congress, the country s GNP amounted to USD 2.08 trillion in 2007 some USD per inhabitant. Growth rate is reported to be 7.1%. The Russian trade balance is active USD 365 billion of exports against 261 billion of imports in 2007 which means the country has been able to build up the third largest currency reserve in the world. Enormous reserves of natural gas and oil have formed the basis of this strong development and have turned Russia into the world s biggest energy producer. According to a survey of worldwide consumption of tomato products carried out in 2008, Russia ranks 6 th in the world in terms of national consumption, behind the USA, Italy, the United Kingdom, Turkey and Brazil, with almost 1.1 million tonnes in farm weight equivalent consumed each year. Russian per capita consumption is higher than the global average (just below 6 kg per person per year), and individual consumption is recorded at 7.6 kg per year in farm weight equivalent, ranking the country 53 rd on a worldwide scale. Yet Russia does not have the means to ensure a corresponding production and processing pack. The country was once a major tomato processor: in the 80s, Russia ranked 10 th in terms of global consumption of tomato products, producing 1.45 million tonnes of raw tomatoes and processing tonnes of them. From the end of the 60s to the early 80s, the Russian government had set up a development programme for the tomato processing industry, which led to the construction of 80 factories in the South of the country. Processing mainly consisted in manufacturing 23/25 paste and some of the usual sauce products. The arrival of the market economy spelled the end of the Russian tomato industry. The marked deterioration of the processing installations, the low level of investment in machinery for growing and harvesting crops, the drop in government aid, the lack of available investment and the disappearance of capital, in the context of adapting to the new

2 economic situation of the perestroika period all these factors led to the near extinction of tomato acreage and the replacement of national production by products imported from abroad. In only 15 years, from 1988 to 2004, paste production had virtually disappeared, but made a slight comeback in According to local sources, tonnes of paste were manufactured in 2008 in Russia, including 40% in the region of Astrakhan. Although this volume is low, it doubles the 2007 result, while being 30 times lower than the result of The Russian industry is aware of its needs and its dependence on imported products, and is therefore considering a number of development projects, mainly reconditioning operations at first, in order to escape import taxation as well as costly and lengthy transport requirements and fluctuations in the currency exchange rate. In the end, it is quite possible that Russia might start up again its processing operations of raw tomatoes: according to local sources, three regions located in the European tomato zone (Rostov, Astrakhan and Krasnodar) all at the same latitude as the Ukrainian regions where processing tomatoes are grown, could be used to develop the tomato industry. The trends observed on the Russian market for tomato product consumption justify this approach from 2004 to 2007, the consumption of processed vegetables grew 37%, with tomato product consumption increasing by 60%. Tomatoes are part of traditional Russian cooking, which is apparent in the frequent tomato consumption: 34% of Russian homes declare that they consume tomato products one or two times per week and 24% consume them three to four times per week. 14% even declare a daily consumption of tomato products. For the most part, import volumes (amounting to approximately 1.1 million tonnes of raw material equivalent in 2006 and 2007) arrive in Russia in the form of paste, which is then used in second-stage processing to manufacture end products for consumers. Paste imports are mainly processed into ketchup, a product consumed by 60 to 70% of the population and which reaches

3 consumption levels of 4.5 kg per person per year in the Moscow region. The current growth rate of the category in terms of volume is 1.5 to 2%. Yet it is a fact that the country is heavily dependent on imported products, which satisfy 98% of the national demand. This dependence is increasingly apparent over the past eleven years, imported volumes (expressed in farm weight equivalent) have increased by almost 20%. This sharp rise should not hide another increase: the share of paste in the total import volume. From 1997 to 2007, at the same time as total tomato product imports rose 1.7% each year, the proportion of paste grew from 44% to 90%, mainly at the expense of imported sauces & ketchup and juice. These two categories recorded foreign purchases of tonnes in farm weight equivalent in 1997, but only weighed tonnes in 2007, which confirms the marked recovery of the second-stage processing industry in Russia, now operating in a context of increasing demand. The main result of this ten-year period, given the explosive growth of Russian paste imports, is the increasing role played by local operators (both Russian and foreign) in the second-stage processing industry, which has replaced a large part of the imported tonnage of reprocessed products. About twenty country feature among the suppliers of the Russian market, but only five or six of these really benefit from the wide gap between demand and national production capacity: China, Iran, Uzbekistan, Italy and Portugal. In 2007, these five countries covered almost 80% of total Russian supply needs for tomato products. Minor suppliers to the Russian market include Spain, Turkey, Ukraine, the Netherlands and Armenia.

4 The volume progression of Russian purchases and their reorientation according to product categories over the past ten years has been accompanied, for obvious geopolitical reasons, by a geographical reorganisation. Some of the previous satellite states of the Soviet Union have borne the brunt of the opening of the market to products from other origins and of the development of the Russian second-stage processing industry. Bulgaria and Hungary, in particular, which accounted for a third of Russia s purchases in 1997, only account for 0.5% of total imports in Paste In eleven years, paste imports have increased three-fold. In a detailed breakdown according to product types, the past eleven years have almost seen the extinction of imports of low-concentration products (<12%) and retail conditioned products (1 kg packs or less). Above all, there has been a lightning growth of the 36/38 paste category, with purchases amounting to 60% of import tonnage in 2007 for that category.

5 The main operators supplying Russia with paste in 2007 were China (47 %), Iran (12 %), Uzbekistan (12 %) and Italy (9 %). In 1997, Italy was supplying about a third of the Russian paste purchases, Iran 20%, Uzbekistan 15% and China 3%. In addition to the usual leaders of the international market, several other countries benefitted from the development of Russian paste import activities, including those that are geographically close, like Turkey, Armenia, Tajikistan, Ukraine, etc. (Cf. the chart at the end of this article). Paste sold in its basic form accounts for 34 % of sales, and is a common household purchase, used in many dishes, soups and sauces. From 2004 to 2007, this category grew 40% in volume, and demand for high quality products

6 is increasing. So local operators are expecting an annual growth rate for the market of about 6%. For the most part, the paste sold on the retail market is packed in cans (61%), with glass jars accounting for 39%. The main players on the Russian paste market are Pomidorka (35% market share), Baltimor (7.8%) and Kuhmaster (4.8%). Canned tomatoes From 1997 to 2007, Russian imports of canned tomatoes remained more or less stable, around an annual average of tonnes. Even more so than for paste, Russian supplies of canned tomatoes are the reserve of a small number of countries: in 2007, four countries (Italy, Ukraine, Hungary and Moldavia) shared 83% of the canned tomato sales to Russia. China, Vietnam and Greece also had a role to play in this category.

7 In a detailed breakdown, unpeeled tomatoes (whole or chopped) always account for the most part of Russian canned tomato imports, but there has been a noticeable slide in recent years towards peeled tomatoes, with a proportional increase from 15% in 1997 to 39% in Sauces & ketchup In ten years, sauces & ketchup imports have undergone a dramatic drop, from tonnes in 1997 to tonnes in Yet ketchup is a key product of Russian tomato product consumption, with some tonnes consumed in 2007 against less than tonnes in this exceptional growth is the result of local industry taking over the processing of added-value endproducts made from imported paste. The development of foreign purchases, which is apparent since 2002/2003, is probably due to the limitation of the Russian reprocessing industry in terms of capacity, or to the more attractive costs of foreign made products. Several brands share the Russian ketchup market, including the eight most familiar names, in order of importance: Baltimor, Heinz, Pickador, Calvé, Krasnodarskaya, Chumak, Uncle Bens and Torchin. Bulgaria was for a long time the main supplier of Russian demand in this category ( tonnes in 1997 less than 500 tonnes in 2007). So it has been heavily affected by this radical shift in sourcing products for satisfying national requirements. The same can be said of Hungary ( tonnes in 1998 against 33 in 2007).But other countries like Denmark, Finland, Estonia, China and Turkey also feature among the countries whose sales of sauces and ketchup to Russia fell brutally between 1997 and 2001.

8 The beneficiaries of these changes, those that have managed to maintain or develop their sauces & ketchup exports to Russia, are the Netherlands, the Ukraine and Vietnam. In 1997, these three countries accounted for 86% of Russian imports of sauces and ketchup. Russian exports of sauces and ketchup have increased 135 % each year! Unlike other categories, (paste, canned tomatoes), for which Russia is only an import player, the sauces & ketchup category has seen remarkable Russian activity on the export market. Without any pretensions at an active trade balance, the Russian industry has exported various sauces in quantities that are not to be ignored, and the previous satellite countries of Russia make up the most part of its buyers. In eleven years, sales volumes have grown from less than tonnes to more than tonnes an annual growth rate of 135%.

9 Tomato juice Much like sauces & ketchup, juice imports have undergone a sharp drop over the past eleven years, with purchases falling from tonnes in 1997 to tonnes in Once again, it is the countries that are closest geographically that have borne the brunt of this decrease particularly Hungary, Finland and Moldavia. Ukraine, on the other hand, has been able to maintain and develop its sales of tomato juice to Russia, increasing them from 700 tonnes in 1997 to tonnes in 2007 (68% of Russian juice imports). The following tables present the figures for Russian imports (and exports in the cases of sauces & ketchup) from 1997 to 2007.

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11 (Source: Presentation by Mr. Sidorenko (Desan) at the 2008 Congress in Toronto, Tomato News, November 2008)