Cashing in as Russians lurch from Lenin to lager

St Petersburg is different for the rich and poor. Picture / Jim Eagles

A crisp autumn day, and a middle-aged man is walking through a sprawling, Stalin-era housing estate on the outskirts of St Petersburg. Walking is probably putting it too strongly, though: this is more like a lurching shuffle. He is blind drunk. It is 11am.

Yet just a few miles away, in the centre of St Petersburg, the palaces and avenues built by Peter the Great and his descendants boast luxury hotels, restaurants and department stores. Well-dressed Russians bustle down Nevsky Prospect, the main drag, or drive the thousands of cars that clog the streets.

These two sides of one city sum up the new Russia, just 15 years after the dissolution of the Soviet Union. Alcoholism is rife and so is crime. Many live in dire poverty.

Yet this is boom time. The soaring price of crude has enriched Russia, the world's second-largest exporter of oil after Saudi Arabia.

The economy is growing around 6 per cent a year, the Kremlin is projecting a budget surplus of 1.5 trillion rubles ($85 billion) next year, and in August Russia was able to clear its US$22 billion ($33 billion) Soviet-era debt to the 17 Western countries known as the Paris Club.

Eight years ago, when the country defaulted on its debt and sparked a financial crisis, the oil price was around $13 a barrel. This year it has gone well over $70.

As yet this wealth is not equally distributed. Russia sprawls across 11 time zones, and local economies vary vastly. It boasts the third highest number of dollar billionaires in the world (after the US and Germany), but average monthly income is estimated at just $1290 a person in Moscow - and $460 in the rest of Russia. Moscow accounts for around a fifth of the retail market, even though it only has 7 per cent of the country's 143 million population.

"There is currently a wide disparity in wealth within the Russian economy," says Chris Green, a senior economist at MNB Capital Markets.

"The Russian Government is looking towards enlarging the size of the middle class, and the development of the property market will play a part in this. Until recently, flats were generally purchased with a suitcase full of cash, but mortgages are being introduced by the banks.

"As people use these, and financial markets generally become more sophisticated, it can be expected to free up people's finances to spend more on consumer goods."

So while the wealth is unequal, the money is there, and it is attracting Western companies. The motor industry, for instance, has been quick to offer what the newly flush Russian driver wants: according to the Ministry of Industry and Energy, foreign car sales grew by 58 per cent last year.

Also taking advantage are consumer goods giants such as Unilever, which sells Lipton, Knorr and Dove among other brands in Russia.

Then there are the retailers. Companies such as Ikea and Marks & Spencer have opened in Russia, though growth has been cautious because of the fragmented retail sector and an outdated, sometimes corrupt property market. The stores are still there, however, and most have plans to expand.


Conspicuous consumption boosts beer industry

One industry that has really taken off is beer, with giants such as InBev and Heineken all present. Baltic Beverages Holdings (BBH), a joint venture between Scottish & Newcastle and Carlsberg is the leading company and is now thought to be worth around $13.6 billion - after only a decade of trading.

"Russians now have the means to show off, so what you drink says a lot about you," says Teimur Akhundov, vice-president of marketing at Baltika Breweries, BBH's main business. The operation has been Scottish & Newcastle's salvation, boosting profits and revenues at the FTSE 100 group at a time when Western markets are stagnating.

BBH's success is not just down to the increase in disposable cash, however, but to a shift in Russian tastes, encouraged by the Government.

Where 20 years ago everyone drank vodka, beer consumption is now soaring. Desperate to get people off spirits, particularly cheap vodka that can kill, the authorities have cracked down.

For instance, a ban was introduced in St Petersburg this summer on selling spirits between 11pm and 7am (most food and drink stores are open 24 hours). In 1998, around 35 per cent of Russians drank just vodka. Now that figure is closer to 18 per cent.

BBH has beers that target vodka drinkers. These might be either strong or cheap. In one hypermarket, a 2.5-litre bottle of Arsenalnoe, a beer with a 5.1 per cent alcohol content, retails for just 49 roubles ($2.78). It also has a beer called Leningradskoe, "for the good old Soviet types", says Akhundov.

But beer also appeals to the more affluent. Both Scottish & Newcastle and Carlsberg have started selling beers under licence through BBH, among them Kronenbourg 1664 and Carlsberg. The leading domestic premium beer is BBH's Baltika 7, while another, Baltika 3, has been exported to the discerning British market.

The Russian drinks market, though, is not a carbon copy of those in Western Europe. In Britain, 60 per cent of beer consumption takes place in pubs, bars and clubs. In Russia, more than 90 per cent is bought in shops. The housing estates of St Petersburg may be vast but they boast not a single pub. In the centre of town sit expensive bars that are out of reach to all but a tiny proportion of St Petersburg's five million citizens.

Most Russians are in the habit of nipping to street-corner kiosks - which sell cigarettes, snacks, soft drinks and alcohol - to buy a single bottle of beer. They might then drink this on a park bench in summer, or at home in winter. People drinking alone on the street are a common sight.

Foreign players must contend with the risks inherent in doing business in Russia. This is, after all, a country where only last month Andrei Kozlov, deputy chairman of Russia's Central Bank, was assassinated. And as the oil giants are finding out, President Putin continues to rule with an iron fist.

Putin is also teetotal, and after the Kremlin's attack on spirits, there are early signs of a clampdown on beer, too - such as the decision this year to ban drinks companies from sponsoring sports teams and events.

Yet Tony Froggatt, chief executive of Scottish & Newcastle, is unfazed. "There's always a danger [of a crackdown on beer] - we have got to take that into account. But the key to running any business is balancing risk and opportunity, and that's what we're doing."

The drinks industry "is not as sensitive as energy. All the signs are that Putin is not going to do something that will actively discourage investment. They are sane guys."

Overall, most foreign investors seem confident that the rewards outweigh the risks. "There's lots more potential for growth, especially in the regions," says Svetlana Sukhanova, an analyst at UBS's Moscow arm, Brunswick UBS. "We predict that growth in the retail sector will increase further. Between 2005 and 2010, we estimate that the revenues of food retail alone will increase by 15 per cent each year."

Russia's shift from its Soviet legacy has been relatively quick but it is not complete. The country, for instance, is not a member of the World Trade Organisation. Yet, like Brazil, India and China, it is well on its way to becoming a powerhouse. And consumer companies are making sure they are there to cash in as communism finally gives way to capitalism.

- INDEPENDENT