India’s government is requesting Russian officials reduce duties on packed tea imported to Russia. If this happens, domestic tea producers will lose their dominant position on the market.

Lilia Moscalenko

Russian tea producers are alarmed by likely changes to the procedure for collecting duty on imported tea in the nearest future. During Vladimir Putin’s recent visit to India, the Indian government requested Russia reduce duties on packed tea imports. According to Indian officials, the unprecedented high duties of 20% on packed tea from India have drastically reduced tea supplies to Russia and bankrupted local producers. Most tea for Russia is produced in southern India, and, according to Indian officials, this region is now one of the more impoverished in the country.

The Indian government has a number of other claims. For example, the government is concerned in earnest about the fact that Russian producers call their product “Indian”. Indian officials allege that in Russia this brand is used to sell tea not only from Indian plantations but also from Sri Lankian, Indonesian, and Chinese farms. They insist that only a product really produced in India should bear the name of Indian tea. Indian leaders’ intentions are evident: they want to promote Indian producers on the Russian tea market, one of the most attractive now with growth rates of more than 20% a year. In addition, Russia is the third largest tea consumer in the world after India and China.

Ideal difference

Thanks to current import duties on tea (20% on packed products and 5% on unprocessed tea), the domestic tea market has become one of the most successful markets in Russia. The ideal difference between rates on finished and raw products gives incentive to domestic production and safely protects it from foreign rivals (See Expert # 36, 2004). Market players link the establishment of the “right” tariffs with Alfa-Group’s arrival on the market in late 1990s. “At that time, the company decided to diversify its business into the fast-growing Russian food sectors, and, specifically, it began to buy up the largest tea-packing factories in Russia,” says Pavel Isayev, Foreign Relations Director at Mai Company. “Alfa-Group’s tea business failed to develop properly but the company rendered an invaluable service to the Russian tea market: it succeeded in lobbying for the current tariffs.” New companies that appeared on the tea market shortly thereafter, such as Orimi Trade, Avalon, and Mai, began to grow rapidly. Today, more than half of the market is under their control, and they are successfully competing with powerful transnational brands, such as Lipton and Ahmad. “Russia today is one of few countries where transnational companies, for example, Unilever Group, are not prevailing on the market. Thanks to the tariff policy, Russian producers are operating on a par with foreigners and often outpacing them,” says Ramaz Chanturia, General Director of Roschaikofe (Russian Tea and Coffee) Association.

After domestic production began to grow, Indian suppliers left the Russian market. India became solely a supplier of tea inputs, mostly for inexpensive, mass-market tea that makes up 60-70% of the Russian tea market. However, recently India has begun to surrender its position as the main tea supplier to Russian packagers.

Slow suppliers  
In 2003-2004, Russian tea companies reduced their purchases from India and began to work actively with suppliers from Sri Lanka, Vietnam, Indonesia and China. That was why, in experts’ opinion, the “tea issue” was raised during the Russian-Indian summit.

The reduction in input purchases from Indian producers was due to substantial changes in the demand pattern over the last couple of years. “As household incomes grow, the demand has shifted towards products of higher quality in medium-priced and premium segments. Tea consumption has remained stable in Russia over the last few years (150,000-160,000 tons) but in monetary terms the market grows by 20-25% annually, which points to demand re-distribution,” says Chanturia. According to the data available, cheap tea consumption in Russia declines by 3-5% a year, while consumption of more expensive varieties, such as bagged, green, herb and fruit teas, increases by at least 50%.

These changes in demand made Russian producers adjust their business strategies in 2004 and develop pricier market segments. For example, Orimi Trade Company, which traditionally operated in the mass-market segment, has launched its premium brand Greenfield this year. Mai Company has re-branded its Maisky Chai brand. While keeping prices moderate, it has moved to premium tea blends and packaging. For new brands, Russian producers needed inputs of higher quality. “However, the Indians continued to offer us the same poor quality that they had always supplied to the Russian market,” says Isayev. According to experts, there very high quality tea to be had in India, and many European countries, such as the UK, import them. “The cheapest tea grown in India’s southern provinces has been supplied to Russia since the Soviet era,” says Chanturia. “Indian suppliers didn’t even notice that the Russian demand became much more expensive, and as a result, they lost their customers. Indian tea producers’ profits began to fall because of this elementary marketing miscalculation.”

India’s failure to respond to the change in the Russian market was largely because tea production in India is mainly focused on domestic consumption (about 70%). “The countries where production is mainly export-oriented always respond to changes more promptly, like, for example, Sri Lanka,” says Chanturia. When Sri Lankian producers realized 1-1.5 years ago that demand for cheap tea in Russia had come to an end, they began to offer Russian companies inputs of high quality. As a result, Sri Lanka has begun to outpace India in terms of supplies of unpacked tea to Russia.

Military interests
If the difference in duties is reduced (and this is what Indian officials are hoping for), Russian producers will face severe competition from their Asian counterparts. “If the duties for Indian imports are changed, suppliers from Sri Lanka, Vietnam and China will demand the same treatment, and we’ll have to yield to them as well. Hundreds of new players will appear on the market. Given that labor and energy costs are incomparably lower in Asian countries than in Russia, it will be very hard to win,” says Isayev.

The reduction in tariffs would hit Russian producers in low- and medium-priced segments of the tea market hardest. “Asian producers will hardly be able to take on, for example, bagged tea, because it’s a more technologically complex production that requires a large amount of investment. Usually, Indians specialize in production that doesn’t require complex technologies,” says Sergei Kasyanenko, Chairman of Orimi Trade’s Board of Directors. Almost all major Russian producers have mass-market brands: for example, Avalon Company has Chainaya Dolina, Orimi Trade Printsessa Gita and Printsessa Nuri teas, and Mai Company Zavarkin. If Indian producers also learn to respond promptly to demand and offer premium-quality packed tea on the Russian market (similar to tea being supplied to the European market today), Russian companies could fare even worse.

It’s not that simple for Russia to ignore the Indians’ requirements. Today, India is one of the biggest consumers of Russian military equipment. “It’s highly probable that the Russian tea market could be sacrificed to support the defense industry and duties could be reduced under Indian pressure,” says Chanturia.

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