Russia Trades Tankard of Beer for Glass of Vodka

10.09.2009 — Analysis

The RF Ministry of Finance sees beer brewing companies as a cow to be milked. On account of increasing excise tax, the authorities intend to partially make up for the budget deficit. However, a RusBusinessNews observer found out that without tightening the control over the liquor circulation, serious changes in excise rates may cause the country a severe economic and social damage.

In the end of August 2009 the RF Ministry of Finance published a bill whereby the excise rates on beer were to triple by 2012, whilst those on wine and spirits were to grow by 10 to 35% annually. On account on changing the tariffs, the officials intend to raise an extra 60+ billion roubles for the budget.

The warp in the excise policy in the liquor market is evident: brewers are the ones to take the main blow. The market players predict that, due to the need to increase tax contributions, they will have to raise the price of products by 10 to 50%.

"Today, legal strong alcohol in Russia is on average four times more expensive than beer. As the cost of the "froth" drink triples and that of vodka increases insignificantly, beer will cost just a little more than the 80-proof stuff," Serghei Babinskiy, Director of the Baltika Chelyabinsk subsidiary of the Baltika Breweries, notes.

The consumption structure will change inevitably: the experts forecast the increase of strong (including low quality and low cost) alcohol consumption volumes, and reduction of those of beer. Furthermore, according to the ROSSTAT’s 2008 year end data, beer accounts for only 25% of the country’s total alcohol consumption. The share of vodka is 66%; that of wine, 8%. For purposes of comparison, the Czech Republic has a diametrically opposite ratio of beers and wines vs. strong alcohol.

"We are on the same track that the Scandinavian countries were 30 years ago. We’re heading the opposite direction, though," says Viktor Pyatko, Vice President of Heineken International Russia. "They used to have the same problem: the share of strong alcohol in the consumption structure amounted up to 70%. For several years in a row, the authorities gradually increased the tax burden on wine and spirits producers, and tightened the control over the circulation of strong alcohol in the market. As a result, the consumption structure has changed. Low alcohol beverages including beer now account for 60%. As a result, life expectancy in the Scandinavian countries has grown notably."

In addition to the fact that Russians will be looking for a substitute to beers and wines in the strong alcohol market, the reduction of beer production will cause the allied industry sectors to come tumbling down: agro-industry, packaging, transportation services, and retail.

"Breweries purchase more than a half of what we produce," says Kirill Solonovich, Director of Retal Elaterinburg (a part of one of Russia’s largest producers of packaging, PET preforms, and PET films). "Should the brewers suffer, we will lose our key buyers and will have to either look for new sales markets or reduce production."

Let us forget the social problem of the of the country’s population being beer-dependent for a moment, and look at the economy; another trouble is looming large – the decrease of food stores’ profitability. As Alexander Shumilov, director of the Alcohol & Beverages line, Uniland-Ekaterinburg CJSC, says, beer is the best selling product in the stores of small Russian towns. It accounts for about 40-50% of the product range and sales. As a result of falling demand, private entrepreneurs will be forced to either transfer the revenue losses to other products or wind up their business.  

The excise policy will echo in the agro-industry, too. According to the data from Baltika Breweries, brewing barley is currently grown on 1.3 million hectares of Russian fields. About 40 agro-holdings and 600 agro-businesses supply the raw materials to breweries. They will have to look for new sales markets, or redesign their production structure completely. According to expert estimates, currently there are 10-12 people working in related businesses per one person employed in the brewing industry.

As to the brewers proper, they, having reduced production volumes, will find themselves short of a substantial share of revenue. This will cause a snowballing drop of VAT revenues, social levies, and other payments to budgets of all levels. In addition to that, such conditions will cause the entrepreneurs to wind up their investment projects.

Thus, from the economic viewpoint, the effect of tripling the excise on beer will actually boil down to zero. The intention to increase budget revenue by 60 billion roubles on account of brewers may cause the government to face a 30-50% reduction in tax revenues. Meanwhile, according to the data from the Union of Russian Brewers, the industry’s 250 companies have paid about 100 billion roubles to the exchequer in 2008.

Judging by the historical experience of the Russian Government’s lawmaking, if it finds a cow to milk it is unlikely to let go of it. Therefore, the increase of alcohol duties is unavoidable.  It might even have turned out useful, given the high alcohol dependency of Russians. But if you want to make money, you need a set of actions aimed at the regulation of all segments and areas within the development of the industry.

In particular, excise on beers and wines should be increased in a manner commensurate to the increase of those on strong alcohol, which will make it possible to avoid an epidemic transition of the population from beer to vodka. For the authorities it is most important to develop a more efficient system of monitoring the circulation of alcohol containing products. Otherwise mountains of low-quality alcohol will grow over of the buried beer market. As a result, Russia will get neither the budget revenues, nor the sobriety of its people.  

Yevghenia Yeryomina