Brewers take on vodka in Russian homeland

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Russia and vodka are inseparable bedfellows but is there room for a ménage-a-trois? Its domestic market for beer is booming, while abroad, drinkers are enjoying the novelty factor of a quality brew from the traditional home of vodka. Mark Rowe investigates

Recent GDP growth in Russia and increases in personal incomes have created an affluent class of local drinkers in the country while health concerns have resulted in a move away from hard spirits and towards beers; this trend has been encouraged by changes in excise duty favouring beer over vodka.

But perhaps the major impetus has come from European Union authorities that have issued loans to the Russian drinks industry, usually tied to much-needed environmental improvements.

During Soviet rule most state industries - including beer and vodka producers - ran up huge costs with impunity, resulting in expensive energy bills and even higher greenhouse gas and other polluting emissions. Now a succession of loans is enabling emerging local companies to clean up their act. It has helped brewers to bring beer quality in Russia rapidly up to developed world standards and to increase accessibility to their products through increases in capacity, more efficient distribution and better storage.

The European Bank for Reconstruction and Development (EBRD), for instance, agreed to lend €10m to Denmark's Danfoss Solutions, with the intention of financing investment in energy-efficiency projects in Russia. The project aims to allow breweries to reduce utility bills by up to 20%, while reducing their greenhouse gas emissions.

In another deal, the International Finance Corporation (IFC) of the World Bank has lent US$10m to Ruscam, a Russia-based glass bottle supplier, in a seven-year loan deal aimed to finance a second furnace that will enable Ruscam to increase its glass making capacity by 315 tons per day.

Last year the IFC also agreed to fund a project involving the expansion of Bravo International, the fourth largest brewery in Russia and now owned by Heineken, whose St Petersburg brewery produces top brands such as Botchkarov. The US$45m project includes investments in the company's brewhouses, filling lines, fermentation tanks and distribution network. Beer production capacity is to expand from 3.25m hectolitres in 2000 to 5.25 m hl per annum to meet demand in the premium and mid-range beer markets.

This is a long way from Mikhail Gorbachev's anti-drinks policy that caused USSR beer production to shrink to almost half of its volume at the end of the 1980s. Subtleties in production are emerging, that, while nothing compared to those of Belgium, represent a quantum leap for Russian drinkers.

Botchkarov, for example, is now produced as a standard lager with 5% alcohol, but also as a white beer, a heavy, dark beer with 8% alcohol and a non-alcohol beer. Small production bases are also flourishing: St Petersburg microbrewery chain Tinkoff plans to offer investors up to 50% of its shares by 2005. By the end of 2004, the company intends to complete the placement of 25% of its shares, which it estimates to be worth up to US$15m.

Baltic Beverages Holding (BBH), which owns Baltika, the market leader for beer in the former Baltic republics and Russia and now the biggest brewer in Europe, operates 14 breweries across the former Soviet Union with three more under construction. Export sales, particularly to Latvia, Ukraine and Belarus and to the west, including the US and Israel, represent 10% of Baltika's market and last year the brewery exported 1.7m hectolitres.

Christian Ramm-Schmidt, president of BBH, is no doubt that the alcohol market is moving in favour of beer exports. "Russian beer has a certain appeal abroad," he said. "It's exotic and it carries a curiosity factor. Russian beer didn't have a reputation for high quality during Soviet times. Production plants were run down and infections would destroy the beer. But the beer boom has been remarkable with 20% sales growth year on year for five years. We are running as fast as possible to keep up with demand."

Ramm-Schmidt acknowledges the help from European agencies. "It's mainly the EBRD which has financed the reconstruction, but they are a profit-making organisation and they would only put money into sectors they feel have good prospects. Russian beer is just that. But the western beer market is very crowded and it's a challenge to break through and find a niche."

Russian government figures back up the growing emergence of non-vodka alcoholic drinks in the Russian production market. Beer consumption has risen by 26.5% in the past two years, cognac by 18%, sparkling wines by 11.1%, and vodka by just 7.1%.

But Russian wine makers and particularly those of the Caucasus in former Soviet republics such as Georgia are facing challenges from the importation of the established wine brands of the world and this has seen the manufacture of grape wines in the ex-USSR decrease by 1% in the past two years.

Despite a fall the growth of Russian beer sales in recent months, officials at Ochakova, the only large-scale brewery still entirely Russian owned, are confident the cache of Russian beer is here to stay. "We've had support and input at European level," said a spokesman. "Production is increasing but it is a very wide market and the export market is still only one direction for us to go."

Ochakova first exported beer to duty free shops in the United Arab Emirates but now exports to 20 countries including in Western Europe and the United States. "There's a fascination with things from Russia whether its beer, rye bread or sausages," said the spokesman. "But for now our main export market is the Russian emigrant communities around the world."

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