Studies Eastern European Markets
Eastern European Markets
June, 2006

Anna-Mari Ylä-Kojola
Northern Dimension Research Centre
Publication 27.

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Russia is an interesting market and the biggest trading partner of Finland. The closeness of Russia has attracted many Finnish companies to invest there. Those who have not done it yet, are considering investment seriously. The unpredictability of the business environment is a well known fact and a reason for some companies to avoid Russia. The membership of Russia in the World Trade Organization is highly desired among foreign investors and trade partners, both Finnish and others, but seems to be a rather secondary goal for the Russians. The Russians are willing to join WTO, but not at any cost. The negotiation process has taken longer than expected and Russia does not make any effort to make it faster. The Russian WTO membership would bring benefits for Russian trading partners and companies operating in the country, but the benefits would be more substantial for Russia herself. As the application process can still take years, foreign investors should not expect the membership to solve their problems immediately.

Many companies who have been brave enough to invest in Russia have got a reasonable return for the investment. 144 million people are an attractive market. The disposable income of Russians is growing fast and people earn more money than ever. In the future the Russians will consume more expensive and high value added products. This study has given an overview of the agri-food sector in Russia about 15 years after the collapse of the Soviet economy. The communist legacy still influences the agriculture and food processing, and all other aspects of the economy as well. Agricultural productivity is far from the level of e.g. Western Europe, and farms lack investment funds. Especially in the early period of transition, the agricultural production and foodstuff output showed deep drops.

A big share of the products are still bought in open markets and unprocessed. In the Soviet era, the prices were fixed and quantity was emphasized over quality, and now the companies have to adjust to new market environment. In 1998 Russia encountered a financial crisis, which affected the economy tremendously. The ruble lost a big part of its value and people faced decreasing purchasing power. Imports became suddenly four times more expensive. But the crisis gave a boost to local industrial production and exports as well. Russia was able to recover fast, and since 1999 the Russian GDP has been growing every year.

Energy products are abundant in Russia, and thus quite inexpensive to local consumers. Thanks to high oil and raw material prices in the world market, Russia has been able to enhance her export income. A large part of Russian exports consists of energy products and raw materials. The Russian dependence on natural resources can be fateful, since raw material prices can fluctuate in the world market hugely. Collapse in the oil and raw material prices would affect the Russian economy negatively.

Currently the raw material supply in some food processing sectors is rather hazardous.Especially milk and meat processors have problems in acquiring a sufficient amount of high quality raw material. The central planning in the Soviet system favored input goods instead of consumer goods, and overcoming the communist legacy is not easy. Farms lack funding and a big part of the produce is still sold unprocessed in open markets. The milk processing industry suffers from raw material shortage. The competition in this sector, which is rather consolidated, is fierce. Wimm-Bill-Dann is the leading local company.

Many multinational companies, such as Danone, have entered the country. Similarly, the meat processing industry suffers from raw material shortage, but this sector is not as consolidated as the milk processing sector.

Confectionery is mostly a foreign-owned sector, but recently also local companies have been able to gain a market share. On the other hand, the bakery sector is mostly locally owned. In future the food sector will consolidate further. If the trend is similar in Russia as it has been in Eastern Europe, the foreign ownership will increase.

Russian regions are not equally developed and the purchasing power of consumers varies a lot. The most obvious and lucrative direction for the expansion of successful food processing companies can be found in the regions where the purchasing power is the highest. The richest regions have natural resources, or they are commercial or financial centers. Retailers have already started their expansion into new regions, which creates opportunities for food processing companies in new locations.

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NORDI, Northern Dimension Research Center
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