Comment - Spirits - Russia's Vodka Black Market Could Get Blacker
Russia has a long - and troubled - relationship with vodka
Minimum pricing has been the talk of the town this year for alcoholic drinks. In Russia, a nation built on vodka, the Government has moved beyond its introduction of a minimum price for its national spirit and is mulling doubling the current limit. Richard Woodard argues, however, that a country as at ease with the black market as Russia, could struggle to cope with the fallout of such a move.
A mate of mine at university had this curious habit when drinking vodka - after taking a sip he’d bend down and hide the glass under his chair. And, he didn’t even realise he was doing it.
But this wasn’t some deep-seated Freudian guilt trip brought on by the presence of hard liquor. It was the automatic gesture of someone who had just spent a year living in Russia, at the time in a state of semi-prohibition.
Mikhail Gorbachev may be widely admired in the West for ushering in the end of the Cold War, but his attempts through the 'dry law' to regulate the drinking habits of his fellow countrymen were nothing short of disastrous. Price rises, severe restrictions on sales and editing out alcohol from films created a thriving black market and an estimated RUB100bn (US$3.26bn) hole in the state finances. Oh, and a population that hid drinks under furniture in case they got into trouble.
The doomed measures, abandoned in 1987, were one of a series of attempts to tackle Russia’s destructive relationship with alcohol, which makes an English town centre on a Saturday night look like a meeting of the local Temperance Society. Similar crackdowns were launched in 1958 and 1972 – not to mention the period of Prohibition which lasted from 1914 to 1925.
In the West, it’s become commonplace to talk about the “social cost” of alcohol, in terms of crime, violence, increased hospital admissions and long-term health issues. In Russia, they talk about the dead.
According to The Lancet, booze kills up to 600,000 Russians a year, although I’m not sure if this includes the thousands who die from drinking industrial alcohol in the form of household cleaning products and perfumes.
Russian men have an average life expectancy of 59 and, if they die before they’re 50, there’s a one in two chance that alcohol was to blame.
Russian president Dmitry Medvedev says the situation is a “national disaster”, and it’s hard to argue with him. But, the measures currently being enacted by his government are yet another misguided attempt to deal with the issue, doomed to inevitable failure. What’s worse, they can also be viewed as a deeply cynical move designed to increase tax revenues and boost the sales of vodka producers.
In January this year, Medvedev set a minimum price of RUB89 per half-litre of vodka, and deputy finance minister Sergei Shatalov will use staggered tax increases to raise that figure to RUB200 by 2013.
Shatalov justifies the planned tax increases by saying: “Vodka doesn’t need to be cheap as it’s not a necessity”. But, try telling that to the millions of poverty-stricken and alcohol-dependent people in Russia. Without medical intervention, they will surely just go to the black market or kill themselves by drinking household products laced with industrial alcohol.
The average price of legal vodka prior to the introduction of minimum pricing was about RUB110, while the contraband stuff was between RUB35 and RUB70. Real moonshine, at no considerable risk to internal organs, was just RUB25.
Early reports suggest that minimum pricing has had some impact on the grey market, but why should it affect black market sales in the slightest? If you’re already operating outside the law, why would you take any notice of the new regulations?
Instead, the black market will thrive as a result of these measures, driven on by a desperate consumer base priced out of the legal vodka category.
The Russian government has a bit of history here. Back in early 2006, I was in Moscow when the administration reformed the excise duty stamps system.
There was only one problem: printing and distribution of the new stamps was delayed, causing a shutdown in production, a shortage of legal vodka – and a huge increase in deaths as drinkers turned to less sanitary alternatives instead.
Set a minimum price for vodka and you risk repeating that disaster all over again, particularly when it reaches RUB200 in 2013, well above the current price of the cheapest brands on the market.
There’s a commercial impact here too. Companies like Central European Distribution Corp (CEDC), while seeing a sales rise on the back of the introduction of minimum pricing, have noticed margins shrinking as “grey market” consumers switch to the cheapest legal brands, dragging down average pricing.
The phased increase of minimum pricing may help to ease this situation – but only if it doesn’t drive increasing numbers of people towards the black market. And, given the chronic nature of Russia’s alcohol-related social problems, it’s hard to escape the conclusion that that’s exactly what will happen.
As the next few years pass, the only real way of assessing the efficacy of Russia’s new minimum pricing system will be to count the number of legal bottles sold – and the number of deaths.
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