Today Russian government has a unique opportunity to analyze its own activity during the last decade. What did the government do for the alcohol industry? During this last decade the state’s excise policy was just good for nothing because its only goal was to keep excise gatherings getting higher. And as crude oil price started to grow since early 2000s the government totally lost interest to excise policy as a possible regulator of alcohol market. Pre-crisis market of vodka and cheap substitutes demonstrated stability with about 25% of market volume provided by cheap substitutes, another 25% – by undocumented vodka, and 50% – by legal product.
The only goal pursued by excise policy was to make sure every next year the amount of the collected excises got higher. That was it. Growth of excise taxes did the job. This perfect mechanism worked quite steadily before recession, but blows of the crisis caused shifts towards illegal products. Minimum Retail Price (MRP) introduced since January 1, 2010 made legal retail sell legal vodka only. And God only knows what is happening in segment of cheap vodka substitutes and undocumented products. On June 21, 2001 the government set the minimum manufacturer price for vodka – 38 rubles per liter ExWorks (19 rubles per 0.5 liter bottle). On January 1, 2010 a new minimum manufacturer price was set – 70 rubles per liter. Thus in 9 years manufacturer prices for vodka in Russia increased just by 3.9 times. As on January 1, 2011 this growth already reached 4.3 times.
During 2001-2010 excise tax on vodka increased by 2.4 times – from 88 rubles to 210 rubles. In 2011 the planned increase of excise is by 2.6 times, in 2012 – by 2.9 times, and in 2013 – by 3.18 times. However, seemingly moderate growth of excise tax planned for 2013 should not deceive us.
Excise policy followed by Russian government during the recent decade stimulated and supported development of undocumented vodka and its cheap substitutes – it did and is still does. MRP of 89 rubles (98 rubles since the beginning of 2011) forces out undocumented vodka of the legal retail. Meanwhile in 89 rubles paid for a bottle of legal vodka about 60% (54 rubles) fall on excise and VAT. The government will never refuse this amount which grows on annual basis – and this guaranties long and happy life to undocumented and fraud vodka and its low quality cheap substitutes. Today the government takes every possible steps to improve international image of Russia; in alcohol industry this means making legal retail look almost perfect (being as legal as possible).
In regulation of wine market excise policy did nothing epic, but at least it showed almost no growth during 2003-2009. Thought about necessity of affordable natural wine dawned on the government only in 2010 – but excise policy is no help in this case. On the other hand, in 2009 excise tax accounted for just 2 rubles in 85 rubles bottle of natural Russian wine; in 2013 it will account for 5.3 rubles. In segment of sparkling wines excise constituted 8 rubles per bottle in 2009 and would account for 18 rubles in 2013. Things would look much better if this money is given to Russian vine growers for business development.
Up to 2010 beer was practically a non excisable alcohol beverage; now it is considered a regular alcohol. Of course financially the government benefits from excises so let it deal with the side-effects.
So, during 2001-2005 Russian alcohol market did show certain development and this was reflected – no matter how strange it may seem – in stability of consumption volumes both in legal and undocumented quality vodka and spirits sold via legal retail (about 14-15 liters). Administrative crisis of alcohol market of 2006 (which caused undersupply of alcohol) could have pushed a part of consumers to different segments: exactly since 2006 retail reported decline in the average legal sales of documented vodka and spirits. This decline could have also be driven by other factors like: natural reduction of elderly population, majority of them being advocates of hard drinks (undocumented vodka was more than affordable at that time); slow increase of vodka consumer base (the youth shows more interest in light alcohol – alcopops/premixes, beer – and drugs than in hard drinks); inaccuracy of applied statistics (in analysis of demography, sales, etc.). Bottom line: in 2010 documented retail sales of vodka and spirits will decline by 25-27% against sales of 2001-2005; in 2011 the forecasted declined of sales in the said segment will be at least 30% against 2001-2005.
All this has nothing to do with efficiency of excise policy in segment of documented alcohol – MRP has all the glory. Calculation of MRP is an independent function where excise tax is considered. Even today’s moderate growth of excise taxes will make MRP go up to 140 rubles by 2013 (what drastic changes might happen to consumer incomes in just two years?) respectively cutting consumer base in legal retail and giving a strong impetus to development of local illegal production targeting local market.
Leonid Vigdorovich, owner of “Kazenka” and Chairman of Expert council on issues of state regulation of production and turnover of alcohol organized under Committee of State Duma on economic policy, entrepreneurship and tourism, has recently become quite a public figure in discussion of alcohol industry regulation. He comments: “Today inexpensive alcohol is preferred by the great majority of Russians, thus it would make more sense to differentiate excise taxes according to the price of different categories of alcohol. It is strange indeed that excise collection per bottle of inexpensive and premium vodka is the same”. Maybe this idea will live. However, saying that cheap alcohol “is preferred” is a kind of exaggeration. In fact, most of inexpensive alcohol just fits consumers’ financial abilities and physical needs. Structure of Russian alcohol market with its counterfeit, undocumented, fraud products and cheap substitutes is developed by nothing but social and economic strategies of the government.
Today excise tax on hard drinks reflects social equality of all Russians: 54 rubles per bottle (excise + VAT) is paid both by low income consumers as they switch from 40-60 rubles vodka to legal 89 rubles and wealthy consumers when they buy a bottle of “Beluga” or “Kauffman”.
Let’s say segment of premium vodka (more than 250 rubles/bottle) makes no more than 25 million liters including domestic and imported products; even if excise tax for premium vodka will be set at 100 rubles per 0.5 liter bottle making this category even more expensive; even if this brings extra 2.5-2.7 billion rubles to budget annually – still this doesn’t make big difference. Well, maybe this would keep MRP at 98 rubles during 2012 and 2013.
Let’s do the math. With the scheduled 10% increase of excise tax in 2012 (to reach 50.8 rubles per bottle) MRP would make about 110 rubles and market volume – about 100 million dal. In other words, increase of excise by 4.62 rubles per bottle gives the budget 9.24 billion rubles or (with 1 billion rubles adjustment for the category of other than vodka spirits) 8.3 billion rubles.
Application of ascending excise scale might help to keep relatively affordable price of vodka – cheaper than 100 rubles. The government would never accept this without compensation because it needs money for pensions and shows like 2014 Winter Olympics in Sochi or 2018 FIFA World Cup. This means the above mentioned conditional 8.3 billion rubles should be compensated. Say, this money is compensated by segment of premium vodka (8.3 billion rubles would need about 50 million bottles with retail price higher than 200-250 rubles per bottle). In this case excise per bottle should be increased by 166 rubles over current 46 rubles which makes total 212 rubles of excise per each bottle of premium vodka and retail unit price exceeding 370 rubles. And thus we get the price gap.
If in order to keep “democratic” vodka (unit price 98 rubles) this “compensation burden” is laid upon standard vodka (current unit prices starting with 130 rubles) which currently counts 35 million dal (700 million bottles) then we have totally different picture. Some math again: 8.3 billion rubles divided by 700 million bottles gives 12 rubles of extra excise per bottle now sold for 130 rubles.
All in all, there are various ways to compensate sustained affordability of economy vodka. Let government officials, industry unions and associations give it some thought.
State regulation of alcohol industry should walk hand in hand with corporate social responsibility of alcohol business. CIFRRA is involved in analytics, not lobbying and always expressed its opinion on this topic openly.
We think and have always thought that CSR of any business including alcohol industry can just be limited to law compliance, honest tax paying, sustained product’s quality and safety, providing decent work conditions and living standards to employees. That’s it. So the government should make the choice: if the goal is the noble CSR and patronage – then corruption should stop. It is very likely that business would willingly redirect the “corruption” money to social needs of the country.
CSR never works one-way; neither can it with alcohol business. Social responsibility involves four parties of alcohol market: state, society, consumers and business.
Today we should first of all discuss social responsibility of the government and society to consumers and alcohol business. In our opinion there are several important aspects of social responsibility of the government to consumers and business on alcohol market:
The government should stop disgraceful mass consumption of ethanol containing liquids (ECL) and other alcohol substitutes currently involving 15-20 millions of Russians. Russia remains the only country in the world where low income consumers have no access to legal alcohol. Russian “cheap” legal alcohol is still the most expensive in the civilized world in relation to minimum and average incomes. As it has been already mentioned, high MRP (89 rubles/bottle) pushed half of consumers of undocumented yet quality vodka with unit prices of 40-60 rubles per bottle right to counterfeit vodka and low quality substitutes.
The government should develop efficient program of social and economic counteractions to unrestrained alcohol consumption. This program should involve real allocations to healthy living programs and educative programs for population. This does not imply just bans on sales of alcohol at night, real changes should be done.
The government should develop realizable and efficient program for social and economic support of the youth (every legislative body in our country has a special youth committee). Education, employment, affordable housing – three whales of such program, plus healthy leisure activities for free.
The government should finally provide strict control of product quality by special watchdog committees. Meanwhile actual heads of governmental committees responsible for alcohol quality control should be fired as being not up to qualification and for discredit of control organizations. We are living in the situation where all fraud alcohol is legal and safe and is available in the majority of stores in Russia, just like until January 1, 2010 undocumented vodka in Russia was openly sold under state control in every store for the price by 1.5-2 times lower against documented products.
The government should take efficient measures to minimize share of undocumented and counterfeit vodka and try something new. Simple pushing undocumented vodka from legal retail by pricing policy is not the way as it stimulates illegal production and sales. Of course, legal retail reports 45% decline of undocumented vodka in January-September 2010, but all this “decline” would turn into “increase” in counterfeit vodka and cheap low quality substitutes. This opened no possibilities for legal alcohol business to fill the dent left by undocumented vodka on retail shelves.
The government should take steps to change alcohol consumption structure in order to reduce consumption of hard drinks in favor of natural wine and not beer, alcopops and other low-alcohol drinks. Even Onishenko already talks about this. Rosalkogolregulirovanie (RAR) and other organizations are doing something in segment of hard drinks (introduced MRP for vodka and cognac, etc.) but absolutely nothing has been done for vine growing and wine making in two years. It takes 5-6 years from the establishment of production to ready wine, and 2 years have been lost already. Another important point is development of vine growing and wine production in the South of Russia (this would provide job for unemployed inhabitants of the Caucasus).
The government should also guarantee safe operation to the law-abiding companies during the period of license change in 2011. Besides, law projects of some lawmakers stimulate continuous fuss on alcohol market. RAR should go through this procedure in well-organized, smooth and timely manner. Of course, there will be many complaints against RAR, so state services should be ready to deals with such complaints and take decisions with no delays.
FAS and other federal services should guarantee equality to state and private companies. Today this rule is not obeyed. FAS should prevent dominance of RSP products and keep the share of such products at under-monopoly level both regionally and in the country in general.
The government should protect interests of SME regional alcohol companies in case of simulated agglomeration of alcohol business and forcing out of small regional operators off the market to the benefit of federal, state and private operators during the future alcohol reform. Prevent another saturnalia on ethanol market which might be stimulated by installation of DDGS utilization equipment.
The government should stimulate vodka export from Russia. Vodka is a national drink no worse than whisky, rum, gin, tequila, cognac and champagne protected by laws of their countries of origin. All countries except Russia stimulate export of their national drinks and beverages. No domestic anti-alcohol programs should interfere with development of vodka export from Russia.
The government should follow reasonable excise policy, forecast the consequences and relate excise tariff to product cost, purchasing power of consumers and their actual demand for alcohol. As soon as the government wants to keep low income people away from quality legal alcohol and at the same time is unable to fight undocumented, fraud, counterfeit vodka and cheap low quality substitutes, then excise policy should consider that under the said circumstances all segments of alcohol market work like communicating vessels and that in 2012 Russian consumers would overcome the psychological barrier of minimum price for vodka.
The government should fulfill the program of changing specialization of already closed distilleries and those planned to be closed in 2011. Advocates of shutting down excess production facilities should demonstrate state approach to this problem.
The government should protect domestic manufacturers in the frames of Customs Alliance and WTO in a civilized manner, avoiding methods of Rospotrebnadzor.
The government should prevent deliberate causing of bankruptcy of viable private companies by federal organizations and banks.
The government should stop changing rules on alcohol market every year – alas, this seems to be too much to ask for…
The government should stimulate investment attraction to alcohol business like to any other industry. Alcohol business is not for the outlaws and enemies of Russia.
In Russia any business works exactly as it is allowed to by the government, exactly the way it is organized and regulated by legislative and executive bodies. Bad organization and regulation leads to bad operation. Today we finally have the basis for efficient planning and further fulfillment. Basis is not a material thing though. Not yet!
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Russian Food & Drinks Market Magazine - is a full-colour, illustrated informative and analytical magazine that is devoted to the food market in Russia. It has been in existence since 1993, appears 6 times a year, has up to 144 pages and has a circulation of 45,000 copies. It is the acknowledged leader in the field of specialized information about the Russian food market.
