Guest blog: Paying a high price
Russian consumers have not yet witnessed any noticeable impact of economic sanctions and a mass exodus of Western businesses on the tea and coffee market. Still, as dark clouds keep piling above the Russian economy, the long-term outlook remains grim.
Russian tea and coffee industry association Roschaicoffee forecasted a 5% to 7% drop in consumption in 2022. This is described as a technical correction, not comparable to a 30% slump in demand during the first lockdowns imposed in the country to slow down the spread of Covid-19 in the first half of 2020. So far, coffee roasters across the country have managed to maintain business as usual.
In August, the Russian Agricultural Ministry ensured Russians that no shortage of coffee or tea on the domestic market was anticipated. It was said that almost all supplies of raw tea and coffee came from countries deemed as friendly. The largest tea suppliers to Russia are Kenya, Sri Lanka, China, and Vietnam, while in coffee it is Vietnam, Brazil, Italy, and Indonesia. Except for Italy, these countries have not joined the Western sanctions imposed against Russia over its invasion of Ukraine.
However, the Russian government’s optimism is not entirely justified. Between April and May, Russian imports of raw tea and coffee were halved compared to the year-ago period. Ramaz Chanturia, general director of the Roschaicoffee, attributed these dynamics to the logistics crunch, as the majority of product batches from Asia and Latin America were passing through European port hubs. However, the world’s leading cargo carriers have refused to call the Russian ports, and the Russian vessels are banned from calling the European ports.
Russian companies are struggling to rebuild the logistics chain redirecting supplies to Iranian and Chinese ports, Chanturia disclosed, expressing confidence that the problems would be eventually solved. Still, there are signs that even so, the new logistics schemes are associated with extremely high costs and extended delivery times. Local market players warned that, on average, it takes 90 days for a shipment to be delivered to Russia, compared to the usual 35 to 40 days.
In 2022, tea and coffee jumped in price in retail in Russia by 30% to 60%. Russian retailers attribute the upward price rally to problems with package and logistics. However, the rise in costs is still partly downplayed by the strong ruble. Most forecasts expect the Russian currency to weaken substantially in 2023, so the Russian market will likely be braced for another upward price rally.
Western Business is Fleeing
Since 24 February, over 1,000 companies have withdrawn from Russia, as estimated by Yale University. This list includes the largest tea and coffee companies and keeps growing. In August, Rotterdam-based tea company Ekaterra announced plans to leave the Russian market. The company, which owns some of the most popular tea brands in Russia, such as Lipton and Brooke Bond, promised to suspend production in the country by the end of the year.
Russian newspaper Kommersant reported that the Unilever factory in St Petersburg where Ekaterra products are packed, may be shut down permanently.
However, the Russian government threatened foreign businesses suspending operations in the country with forced nationalisation of their production assets. The strategy called to prevent an outbreak of unemployment means that by simply setting the production facilities offline, the owners could eventually lose them. This has already happened with the Renault plant, nationalised by Moscow authorities in May to revive the production of an old Soviet brand.
In this background, most companies severing their ties with the Russian market prefer to sell their production assets to Russian investors, providing they manage to find any. Thus, in August, Laurens Spethmann Holding AG & Co, owner of the Milford brand, sold its Russian division to local management. A similar step was made by Tchibo, which sold the Russian business to the general director of Tchibo CIS, Mikhail Kovalevsky. Beginning in 2023, Tchibo CIS must stop using any brands and labels related to Tchibo.
A Delayed Effect
Under the pressure of unprecedented Western sanctions, the Russian economy has not crumbled, and things seemingly remain normal from the outside. However, it would be wrong to say that the sanctions are not working.
Russia may face a longer and deeper recession as the impact of US and European sanctions spreads, handicapping sectors that the country has relied on for years to power its economy, Bloomberg reported in early September, citing an internal report by the Russian government.
The report paints a dark, gloomy picture of a deep and protracted recession, expanding sanctions, a drop in exports and a lack of critical imports. Furthermore, the Russian budget would lose the lion’s share of its revenue from selling oil and gas — a backbone of the Russian economy for the past few decades. The Russian economy could return to the 2021 level only around 2030 or even later. Mass immigration of the most skilled workers coupled with the demographic crisis would also take a toll.
The crisis is expected to cause slow but steady degradation of the Russian economy, affecting all segments of the consumer markets without exception. The Russian population’s falling purchaser power will gradually change consumer habits, as customers would be forced to switch to lower quality, cheaper alternatives, avoid unnecessary purchases and start counting calories. The Russian tea and coffee markets will likely shrink in the years ahead.
In addition, there are huge concerns over the future of the Russian tea and coffee factories. Russia produces nearly 85% of consumed tea and coffee domestically, but all factories run predominantly on Western equipment and technologies. Importing equipment and spare parts into the country is a tricky task right now. This factor already hurts several other industries.
The Russian government has introduced a parallel import scheme to help the economy face this challenge so that the necessary goods and equipment could be imported through third companies, including in neutral countries like Turkey and China. However, this tool has not proved worthy so far. All in all, the future of the Russian tea and coffee industries look exceptionally challenging and highly unpredictable.
- Formerly based in Russia, and now living in Georgia, Vladislav Vorotnikov is a multimedia B2B freelance journalist writing about the tea and coffee industry.