Russia is weathering the storm, but problems keep brewing
Grocery store in Russia. Credit: Vlad Vorotnikov
A year ago, the tea and coffee business in Russia was running smoothly, secured by sustainable growth in sales on the domestic market, a well-elaborated supply chain and bright re-export prospects. Then, the conflict with Ukraine happened.
Before Russia was hit with some of the harshest sanctions the world has ever seen, the price of delivering a container with coffee beans to Russia had stood at USD $2,000, said Nikolay Elansky, a co-owner of a St Petersburg-based coffee roasting company. At the peak, the price jumped to as high as $15,000. “We still see such price fluctuations. This is an important factor, and most importantly, unpredictable,” Elansky lamented.
All supply chains Russian coffee companies used to import coffee beans and raw tea is now ruined. Every shipment should be scrupulously tracked. Otherwise, it may never reach Russian soil, or the delivery cost will make its price unbearable, Elansky said.
In previous years, Russia used to import coffee beans to Europe. Some Russian factories exported packed tea and coffee. Now, all former partners are simply afraid to work with their Russian clients, afraid of sanctions, said David Tareladze, deputy dean of the Economy and Finance Faculty at the Russian RANEPA institute. “Currently, everything goes via third countries under a parallel import scheme, and this obviously leads to an increase in final product costs,” Tareladze said.
Still, Russia managed to avoid the worst-case scenario in 2022. In June, Ramaz Chanturia, general director of the Russian association of tea and coffee, Roschaicoffee, warned that Russia had braced for a shortage of tea and coffee, which he had expected to happen in September. He explained that Russia switched to importing through third countries, primarily China, Turkey and Iran. However, all suppliers demanded 100 percent advanced payment, and the delivery time nearly tripled, reaching 90 days.
Besides, all contracts are concluded with a clause that the delivery is not guaranteed — if something happens, Russian importers bear all the risks.
In the second half of 2022, supplies noticeably stabilised. The Eurasia Union — the Russia-led trade block of several post-Soviet countries, abolished import duties on packed tea and coffee so grocery shelves would not be empty.
On the other hand, several major foreign companies, including multinational tea company, Ekaterra, decided to pull out from the Russian market, suspending sales to the country. As a result, market participants estimated the product range in the Russian tea and coffee market last year shrunk by 15 percent to 20 percent in 2022, but a shortage – something the Russian authorities feared the most since it could entail panic buying and social tensions among the Russian population – was averted.
In early 2023, Russian deputy Prime Minister Victoria Abramchenko told the local press that manufacturers keep experiencing certain difficulties such as a lack of filter paper and strings for tea bags, which Russia used to import from countries now deemed unfriendly.
The Russian government abolished a 10 percent import duty on packed tea and coffee last year in a bid to tame food inflation. However, Chanturia explained that it made Russian tea and
coffee factories suffer, especially in the context of soaring logistics costs for coffee beans and tea leaves. Russian factories processing tea and coffee meet roughly 80 percent to 90 percent of demand in the domestic market. Without the import duty, they lose competitiveness against importers, Chanturia warned.
In September, the import duty was reimposed, but there are looming fears that the authorities could resort to this measure again to keep inflation at bay.
Last year, the Russian tea and coffee business handled the rise in retail prices on their own. In 2023, however, the average price on the market is set to rise between 30 and 40 percent, local news outlet 78 estimated, citing Russian economists. If this forecast comes true, it will be the sharpest one-year increase in prices Russia has ever seen.
In the end, ordinary Russian customers will feel the impact. Currently, the price of tea and coffee in Russia is already noticeably higher than in Europe. For a country with more than 20 million citizens living below the poverty line of 12,916 rubles (USD $160) per month, such a price hike will likely take a toll on consumption. Russian tea and coffee consumption has been steadily growing during the past decade, despite all crises, but the future of the Russian market remains highly uncertain, especially since Western sanctions keep squeezing the country’s economy, heralding new problems in the years to come.
- Vlad Vorotnikov is a Batumi, Georgia-based international journalist writing about food, agriculture and consumer markets in Eastern Europe and the CIS region.