The Vodka Report - Russia and Ukraine

Production is down but Russians and Ukrainians are not necessarily drinking any less – Vladislav Vorotnikov investigates


The legal vodka markets of both Russia and Ukraine are in turmoil due to the economic problems facing both countries and a drop in the populations’ income. 

According to data from the Federal Service for State Statistics (Rosstat), in 2014 sales of vodka in Russia dipped 8% from 2013 to 1.3 million nine-litre cases, which is the lowest figure since the time of the fall of the Soviet Union. 

From 2010 to 2013 legal sales of vodka in Russia collapsed by 27% – mainly thanks to the government’s decision to raise excise tax several times during this period. This resulted in the average price of vodka in the market jumping by 75% from RUB121 (US$4) per litre to RUB212 (US$6.5, based on the exchange rate of the beginning of 2014). As reported by Rosstat, in 2014 Russian plants decreased production by an unprecedented 22.3% and supplies to the market by 24.8%. 

Almost the same pattern was revealed in Ukraine. According to data from the Ukraine analytical agency RTRI, during the first three quarters of 2014 total sales of vodka in the country collapsed by 25%. This is backed-up by data from the country’s national statistics service, Gosstat, which states that during this period Ukraine produced 1.95 million nine-litre cases of vodka – which is 19% lower than during the same period in 2013, when the production of vodka in the country also dropped by 17.3%. The collapse of the Ukraine’s market affected not only that country’s manufacturers, but also Russian companies. 

According to official statistics from the Russian Federal Customs Service, export of vodka to Ukraine last year decreased from 27.8 million litres of the total, worth US$38.6 million in 2013, to 13.8 million litres of the total, worth US$12.2 million in 2014. 

For the past two decades Ukraine was the main export destination for Russian vodka, but in 2014 it fell to second place in natural volumes and fifth place in monetary volumes. 

Consumption remains

However, despite the fall in production, current statistics don’t show that Russians and Ukrainians are actually drinking less vodka. Population surveys indicate a decrease of vodka consumption in Russia by 7% during the first two months of the year – but usually such reports cannot be considered accurate. The fact is that both Ukraine and Russia remain at the top of the list of per capita consumption of vodka in the world. 

Following the initiatives of both governments to increase the tax burden on legal trade, large parts of production are now moving into the so-called ‘shadow market’ – not only are these products counterfeit, they can also be a danger to consumers. 

Today, according to the Russian Business Consulting Agency, illegal vodka accounts for 50%-65% of the total Russian vodka market. 

Similarly, in Ukraine, estimates indicate that in 2013 illegal vodka accounted for about 40% of the total market’s size. For obvious reasons it is hard to estimate the actual volume of illegal and counterfeit vodka production, but it is assumed that in both countries the size of this segment grew last year. 

According to Nielsen statistics, the largest decline in sales was observed in the segment of cheap vodka, which is most affected by the anti-alcohol measures of the state. 

Sales in this segment only in the past year in Russia fell by more than 40% in real terms. 

It is noteworthy that the segment of inexpensive vodka (with a price of less than RUB300 (US$6) and UAH120 (US$5) per half litre) is the largest both in Russia, where it accounts for 91% of the total market’s size, and in Ukraine, where it accounts for about 84%. 

Hopes for better year

This year’s figures are hoped to be quite different for producers of vodka in Russia and Ukraine, as the authorities of both countries have applied new policies in response to the problems. 

Both states are currently moving to support vodka producers to defeat illegal sales, so consumers switch back to legal vodka. 

As reported by the deputy head of the Russian Agency for Alcoholic Market Regulating (Rosalcoholregulirovanie) Alexei Kruzalin, in 2014 Russia lost 14% of all consumers from the legal vodka market and the “authorities don’t believe that these people really fully stopped consuming vodka”. 

Therefore, the Russian government decided to support the market with the decision to not raise the level of excise tax on alcohol from January 1 this year, as had been planned. 

Representatives of the largest companies in Russia support this decision, stating that it will definitely support the market’s situation. 

In November last year Ukraine also decided to decrease the volume of excise tax on alcohol by 28.7%. However, a report from the Ukraine’s Association Ukrvodka says expensive energy, the rising cost of Russian gas and fuel and devaluation of the Hryvnia are all hampering sales in the legal market. 

Polish CEDC, which recently united with Russian Standard vodka in the report from the third quarter of 2014, says the decision to freeze the increase of the excise rate in 2015 should support sales in Russia and even lead to a slight increase both in natural and monetary terms. CEDC observers expect an intensifying of the state’s campaign to clamp down on shadow and counterfeit production. 

Tightening legislation

According to Kruzalin the Russian State Duma (parliament) is considering tightening legislation to fight illegal vodka production. In particular, Rosalcoholregulirovanie proposes to confiscate all equipment which has been used for these activities. CEDC’s report says such measures will make the market situation more credible and predictable. 

“Illegal sales of vodka in Russia will really decrease if these legislative initiatives are implemented,” says vice-president of Russian Standard Igor Kosarev.

In his opinion it will support the legal market, as currently the volume of illegal production in Russia accounts for 60%. But the adoption of these measures will mean that, by the third quarter of 2015, this figure would decrease to 40%, he believes. 

CEDC’s main competitor, Synergy, has a similar forecast for the development of the Russian market. Last year it faced a drop in sales of 7% year on year, while in 2013 this figure amounted to 12%. Synergy co-owner Alexander Mechetin believes the size of the illegal market in Russia today is about 50%, but the sales of legal vodka in the near future should stabilise. 

Head of the Union of Alcohol Producers, Dmitry Dobrov, has the same opinion. He says: “The largest alcohol companies believe that in 2015 growth in sales of legal products can be up to 10% due to the reduction of the price difference with the illegal vodka. 

“If legal vodka producers are able to keep the prices at the current level their sales will go up.”

However, the representative of the Siberian Alcohol Group does not expect significant sales growth in 2015. “This year will be difficult for the economy and the population is not ready for the price of legal products on the shelf,” says a spokesperson for the service. 

Ukraine hopes for the best

Representatives of Ukraine’s largest vodka holding company, Bayadera Group, also hopes for the best in 2015, but admits that the situation in the country’s market remains complicated. 

“We have not a simple, but very important year,” says the company’s head, Sergei Velichko. 

“We hope the market will stabilise and the fall of sales will be stopped. The main condition for that is that the excise tax should not be raised, because the level of prices today is already excessive for consumers.

“If the state decides to further increase the excise duties, it is obvious that the market will collapse even further. A further increase in excise duties could be disastrous for the majority of domestic enterprises.”

Velichko adds: “Last year was very difficult and we can hardly expect an increase in the purchasing power of the population. Most likely, it will remain at the same level or even decrease. The price of alcohol this year will continue to rise despite the changes in the excise rate, due to a significant devaluation of the Hryvnia. 

“Almost all enterprises are affected by the changes of the exchange rate of the currency.

“The glass industry has also raised the price of its products. Taking into account all these factors, the margin today is on the verge of zero for all vodka producers,” Velichko concludes.