Macro-Advisory Report: Russian Alcohol Industry, April 2017

April 2017
Russia Alcohol Industry
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Challenges and Opportunities
“The problem with the world is that
everyone is a few drinks behind”
F. Scott Fitzgerald
 A US$40 bln market. The total value of the alcoholic beverage
market is estimated at US$40 bln, with beer sales at
approximately US$15 bln (38%).
 Substantial black market. Illegal products accounted for 38%
of the alcohol market and up to 50% of vodka sales in 2016.
 Beer sales fell 40% since 2008. Sales of alcoholic beverages
have been declining since 2008. Beer sales have fallen 40% in
that period. Last year beer sales fell 3% and a 4% drop is
expected this year. The market is, however, close to levelling
off as the economy pulls out of recession and heads into
sustainable, if modest, annual growth.
 Fast growth in non-alcoholic beer … Non-alcoholic beer has
been bucking the trend, growing 12% YoY in 2016. There is still
considerable scope for further growth as non-alcoholic beer
only accounts for a 1.2% share of the total beer market.
 … and for wine … Demand for Russian wines is also growing
fast and production grew by almost 15% YoY in 2015. This
strong growth trend is expected to continue. The Ministry of
Agriculture developed a draft program for encouraging the
development of wine production.
 … and cider. Demand for cider, perry and mead is also rising
strongly and, in aggregate, volumes rose 35% in 2015 YoY.
 Some import substitution. The large devaluation in the ruble
has led to significant price increases for imported drinks,
leading to a steady substitution of them by more affordable
locally produced products. Craft beers are enjoying strong
growth, albeit from a low base, partly due to competitive
pricing and partly due to changing consumer tastes.
 Little predictability in regulations. Regulatory unpredictability
has resulted in a fluctuating market where the structure of
consumption and leading brands are continually changing.
 State is a competitor. The Russian government has its own
interests in strong alcohol production, through ownership of
production facilities and trademarks.
 No sanctions against alcohol. Alcohol imports have not been
affected by the Russian counter-sanctions which have banned
food imports from the EU, the US and several other nations.
 Demographics are improving. The dramatic fall in the birth
rate during the 1990s has been manifesting itself in much-
reduced numbers of new drinkers (aged 18) becoming
available to the market since 2008. However, this situation is
rectifying itself as the birth rate has been climbing over the
past 15 years on the back of the improving lifestyles.
Population and GDP
Population, mln 143.3
GDP, $ bln (2016) $1,300
GDP p/ cap, US$ $9,069
GDP, PPP p/cap, US$ $23,900
Source: Rosstat, World Bank, Macro-Advisory
Russia Macro Forecasts 2017-18
2017E 2018E
Growth, real % YoY 1.0% 1.5%
GFI, real % YoY 2.0% 3.5%
Retail sales, % YoY 2.0% 3.0%
CPI - year-end, % YoY 4.0% 3.8%
Budget balance, % GDP -2.3% -1.5%
Current account, % GDP 1.9% 2.0%
Unemployment, % eop 5.5% 5.4%
CBR key rate, % 8.5% 7.0%
Average lending rate, % 10.0% 8.5%
RUB/US$, year-end 62.0 64.0
RUB/US$, average 59.0 63.0
RUB/EUR, year-end 65.0 68.0
RUB/EUR, average 62.0 65.0
Average Urals, US$ p/bbl $54 $65
Source: Macro-Advisory estimates
10 Year detail forecasts in Appendix 3
Alcohol Consumption P/Capita (2016)
Pop
mln
Moldova 17.4 4.1
Belarus 17.1 9.5
Lithuania 16.2 2.8
Russia** 14.5 143.4
Czech 14.1 10.6
Ukraine 13.9 44.4
Romania 12.9 19.2
Australia 12.6 24.1
Serbia 12.6 7.1
Portugal 12.5 10.3
U.K. 12.0 65.5
France 11.6 64.9
Germany 10.6 80.6
U.S. 9.0 326.5
Source: Worldometers (Pupulation)
Source: OECD / WHO. (alcohol consumption)
* pure alcohol equivalent
** excluded Crimea
Litres Alcohol *
000 p.a.
Chris Weafer +7 916 349 2039
cjw@macro-advisory.com
http://macro-advisory.com/
Dr. Anna L. Bailey acted as a consultant and
made a significant contribution to this
study.

2
Summary points
Beer sales down 40% since 2008. Sales of alcoholic beverages have been declining since 2008, and that
followed a previous decade of rapid growth. Partly this is because of a tougher regulatory regime, higher
taxes, and healthier life-styles against a poor macroeconomic backdrop. Beer sales have been particularly
badly affected, falling 40% over the past eight years. Last year, beer sales fell 3% and are expected to drop 3-
4% this year.
Proposal to separate beer from strong alcohol. In late 2016, a proposal was made by the Economy Ministry
to have beer separately regulated from stronger alcohol. That would, if passed, reverse some of the tax and
regulatory pressures which have hit beer sales badly in recent years.
Some import substitution. The large devaluation of the ruble has led to significant price increases for
imported drinks, leading to a steady substitution of them by more affordable locally produced products.
Bureaucratic disruption. 2016 was a year of substantial disruption for importers of alcohol to Russia.
Importers were hit with a deficit of the new type of excise stamps in the summer months, leading to
dramatic falls in imports in Q3. However, this was expected to have been rectified in Q4.
A US$40 bln market. The total value of the alcoholic beverage market in Russia in 2016 is estimated at
approximately US$40 bln, with beer sales at approximately US$15 bln.
Substantial black market. However, it is difficult to get an accurate picture of the total market, especially in
hard alcohol because of the illegal market for vodka, in particular. It is estimated that illegal products
accounted for 38% of the entire alcohol market in 2016.
Fast growth in non-alcoholic beer… Non-alcoholic beer has been bucking the trend, growing 12% YoY in
2016. There is still considerable scope for further growth as non-alcoholic beer only accounts for a 1.2%
share of the total beer market, compared to 5% in Germany and 13% in Spain. Russian consumer habits
continue to migrate towards those of developed European countries.
… and for wine … Demand for Russian wines is also growing fast and production grew by almost 15% in
2015, over the previous year. This strong growth trend is expected to continue. Last year, the Ministry of
Agriculture developed a draft program for encouraging the development of wine production.
… and cider. Demand for cider, perry and mead is also rising strongly and, in aggregate, volumes rose 35% in
2015 YoY.
Very fragmented market. The market for strong alcohol is very fragmented and, as an example, no brand
has greater than 5% of the vodka market.
Little predictability in regulations. Regulatory unpredictability has resulted in a fluctuating market where
the structure of consumption and leading brands are continually changing.
State is a competitor. The Russian government has its own interests in strong alcohol production, through
ownership of production facilities and trademarks.
Insiders also have a strong presence. People close to the Kremlin administration are believed to own stakes
in the vodka industry, although the actual chains of ownership are opaque and shrouded in mystery.

3
No sanctions against alcohol. Alcohol imports have not been affected by the Russian counter-sanctions
which have banned food imports from the EU, the US and several other Western nations since August 2014.
Deteriorating demographics took a toll … Demographic factors are also having a detrimental long-term
impact on consumer demand. The dramatic fall in the birth rate during the 1990s has been manifesting itself
in much reduced numbers of new drinkers (aged 18) becoming available to the market since 2008.
… but the trend is now improving. However, this situation is rectifying itself as the birth rate has been
climbing over the past 15 years on the back of the improving economy and lifestyles. Russia’s population is
now expected to recover to over 147 mln by the end of the next decade whereas some previous predictions
suggested the declining trend would continue and the population fall to closer to 120 mln (see Appendix 3).
Tough Times for Russia’s Bars
Photo: C. Weafer

4
Opportunities for alcoholic beverage companies
Local and craft beer. Small, local beer producers are bucking the trend of a struggling Russian beer market.
They represent a fast-growing segment which has been steadily taking market share from the multinational
brewing companies, and now accounts for around 13% of the market. Recent Russian consumer interest in
local products, following international sanctions, is likely to increase this trend. As in the West, craft beers
are growing in popularity. In 2010, there were just 13 craft breweries in Russia, but by 2015 this figure had
leapt to 98.
Small but growing cider and mead market. In Q1-Q3 of 2016, sales of cider, perry and mead rose by 34.8%
compared to 2015. Although the market remains tiny (0.3% of total beverage sales when measured by pure
alcohol), its robust growth can be seen in the context of growing interest in “alternative” beverages such as
the craft beer sector. Mead, called medovukha in Russian from the word for honey (med), is more familiar to
Russian drinkers than it is to Western consumers, but the possibility of exporting it to Western markets
repacked as a ‘luxury’ beverage is worth exploring.
Possibility of separate regulation for beer being restored. The prospect of beer once again being regulated
separately from stronger alcoholic beverages – as proposed by the Economy Ministry – would represent a
golden opportunity to reverse the major regulatory burden on beer that has accrued in recent years. It is
expected that the brewing industry will be very active in lobbying in support of this initiative.
Vodka market receptive to new brands. The lack of a dominant brand on the Russian vodka market (no
brand has a market share above 5%) means that consumers are receptive to new brands.
Premium import markets. While Russia’s substantial vodka market is dominated by economy brands and
served almost exclusively by domestic production, other types of strong alcohol offer opportunities for
medium-priced and premium foreign brands. Import markets for non-vodka spirits enjoyed substantial
growth since 2000. While the present macroeconomic situation has squeezed these markets, opportunities
still exist and long-term prospects remain good. Advertising restrictions mean that more direct forms of
marketing need to be used to promote new brands among consumers.
Russian wine. Increased domestic demand for local wines, combined with the Russian government’s desire
to promote viticulture in the country, makes Russian winemaking a potentially lucrative area for investment.
Regulatory privileges, subsidies and tax breaks are all real possibilities in the next few years.
Crimean wine. Investment in Crimean vineyards is currently a priority for the Russian government, as it
seeks to rebuild the economy of the former Ukrainian territory. Tax breaks and subsidies for investors are a
possibility, although their extent will depend on the capacity of the federal budget, which is already under
strain from lower oil revenues. Western sanctions against Crimea mean that exports would be limited to
other parts of the Russian Federation and non-traditional markets such as China.

5
Risks
Regulatory unpredictability. There is not a single unified government policy on alcohol regulation. Rather,
policy results from ad hoc battles between government departments, which have a range of different
objectives and are continually lobbying against each other. There is a particular conflict between regulatory
and deregulatory tendencies which makes future policy outcomes difficult to predict – for example, on
advertising and retail sale. The alcohol regulator RAR has a reputation for arbitrariness and has been
frequently accused of engaging in corrupt practices.
Licensing of beer production. The brewing industry has suffered from an unrelenting stream of increased
regulation since the late 2000s. On the one hand, this means that most of the ‘obvious’ policy options to
tighten regulation are already in place, which reduces future policy uncertainty. However, although
proposed licensing of beer production has to-date been successfully fought off, it remains a live policy issue
and a major threat to the industry. While the formal licensing requirements are not particularly costly in
themselves, the brewers fear that, as has happened with the vodka industry, RAR would use its wide-ranging
discretionary powers to impose additional financial and administrative burdens on the industry which could
not be avoided simply by complying with the law.
Excise duty. Future large increases in excise duty on beer, like the 200% increase experienced in 2010, are
not out of the question if the government is faced with a budgetary shortfall. Beer is more likely than vodka
to be the victim of large excise increases as it is less prone to excise avoidance. It is not uncommon for excise
revenues from strong alcohol to actually fall when the rate is increased, as it stimulates the black market.
Another possible instrument of power over vodka producers? There is a risk that, if introduced, a state
monopoly on ethyl alcohol production could be used to favor ‘privileged’ vodka producers (such as those
with ties to the ruling elite), or to halt the production of their rivals.
Possibility of extended sanctions. Following the Crimea Referendum in March 2014, a number of
governments imposed sanctions against prominent individuals in Russia. In August 2014, the sanctions were
extended to include state-controlled banks and other state organizations. Russia responded with a ban on
imported food from the European Union, the US, Norway, Canada and Australia. Although neither the
sanctions nor the counter-sanctions apply to alcoholic beverages, there is always a risk they could be
extended if diplomatic relations worsen still further.
Russians Have Been Resilient in the Face of Sanctions
Source: Yandex.ru

6
Soviet & Yeltsin-era legacies
Command economy promoted vodka over weaker drinks. The USSR had a state monopoly on the
production and sale of alcohol. This meant that the alcohol market was entirely supply-led. The command
economy focused on supplying vodka rather than weaker alcoholic beverages, as they were cheaper and
easier to produce. This has influenced the current structure of consumption, which despite the recent
growth of the beer market remains vodka-heavy.
Yeltsin-era saw vodka predominate still further. Russia was flooded with cheap vodka in the 1990s. There
were three main reasons for this. Firstly, the state fixed an artificially low price for vodka in 1991–92, while
prices for other consumer products were freed. This meant that the relative price of vodka fell dramatically.
Secondly, the state lost control over its basic functions of law enforcement and taxation, which led to the
widespread avoidance of excise duty. Thirdly, special customs privileges were granted to several non-profit
organizations (in practice controlled by organized crime groups), allowing them to import goods without
paying customs duties. Domestic alcohol producers who did not benefit from the ‘privileges’ were rendered
uncompetitive. The bulk of these privileges were ended in 1996. By the end of the 1990s, vodka accounted
for 80 percent of alcohol consumption in contrast to 49 percent in 1984.
Vineyards destroyed. Mikhail Gorbachev oversaw an anti-alcohol campaign in 1985-88. Large areas of
vineyards were destroyed by over-enthusiastic local officials. This resulted in a fivefold decrease in grape
production. In the Kuban, for example, wine production stood at not more than 6 million deciliters in 1998,
down from 22 million deciliters in the mid-1980s. Wine’s share of total alcohol consumption decreased from
40 percent in 1984 to 7 percent by the end of the 1990s.
Expectation of budgetary revenues from alcohol. The Soviet state was heavily dependent on alcohol
revenues. In 1979, they accounted for 29 percent of all taxes paid by the Soviet population, and nine percent
of total state revenue. This expectation that alcohol should be a substantial source of budgetary income has
continued to influence state alcohol policy in the post-Soviet period.
Loss of revenues. According to one estimate, in 1993 the federal government received less than twenty
percent of what it officially should have collected in excise duties on alcohol. Officials stated that during this
early period, ‘the state budget has never, in all its history, received such a small portion of the sales of
alcoholic beverages.’ Attempts to restore these revenues have shaped state alcohol policy ever since.
Controls are Tightening
Source: Wikipedia

7
Consumption patterns and black market
Unreliability of official statistics. Official state statistics on alcohol production and sale are published by the
Federal Service for State Statistics, known as Rosstat. However, these statistics are not reliable as a picture
of overall alcohol consumption due to the size of the illegal market for strong alcohol. The government itself
does not rely on these statistics when formulating alcohol policy. For example, in 2009 the government line
was that per capita consumption was 18 liters, around double that reported by reported by Rosstat.
Steady decline in consumption since 2004. An indication of the trend of per capita alcohol consumption (as
opposed to absolute figures) is given by the rate of death from accidental alcohol poisoning, and the rate of
alcohol psychosis. These two indicators suggest almost identical historic trends: peaks of alcohol
consumption in 1995 and 2003, with a trough in 1998 (the year of the financial crisis and devaluation of the
ruble), and a steady decline in consumption from 2004 onwards.
Large black market. There are no official state statistics on the illegal alcohol market in Russia, and it is
difficult to estimate its true size. Estimates vary by source and year, but a typical figure is that 50% of the
spirits market is illegal. The Accounting Chamber of the Russian Federation estimated that illegal products
accounted for 37.8% of the entire alcohol market in 2016.
Structure of consumption. In terms of recorded consumption alone, in January-September 2016, strong
alcohol accounted for 42.2% of pure alcohol consumed, as against beer and beer-based beverages’ 44.4%.
Wine had 12.5% of recorded consumption, of which 2.2% was champagne and sparkling wines. However,
the large unrecorded vodka market means strong alcohol’s true share in the total structure of consumption
may be closer to 60%.
Rate of Death from Accidental Alcohol Poisoning in Russia (per 100,000)
Source: Rosstat

8
Beverages: Beer
Rise and fall. The Russian beer market enjoyed a period of dramatic growth between 1996 and 2007. Per
capita consumption leapt from 15 liters to 80 liters, respectively. However, Russian government policies
have resulted in the market shrinking substantially since then. Sales have fallen steadily since 2008, with a
market contraction of 35% between 2008 and 2015. 2015 represented a continuation of this trend, with a
year-on-year decline of 10%. Per capita consumption fell to just 50 liters in 2015. Consumption fell by 2.9%
YoY in 2016.
Multinational dominance. The Russian beer market is dominated by major multinational brewing
companies operating through domestic production and local brands. Carlsberg-owned Baltika enjoys the
largest market share at 34.7%, although the company’s share of the market has been gradually shrinking in
recent years (down from nearly 40% in 2009). The remaining major players – ABInbev, Heineken, and Efes
Rus – have market shares in the teens. Ochakovo and Moscow Brewing Company are the largest Russian-
owned brewers, with around 3% of the market each. The major brewing companies have closed 12
breweries since 2008 due to the contracting market.
Growing domestic sector. Small Russian-owned brewers, which are represented by the ‘others’ category in
industry data, have been steadily increasing their market share year-on-year. Thus, the market share taken
by ‘others’ doubled from 13% in 2009 to 26% in 2015.
Regulatory advantage enabled rapid growth. The rapid growth in the beer market 1996–2007 was enabled
by regulatory advantage enjoyed by beer compared to stronger beverages. Thus, beer could be widely
advertised (including on television) and sold in kiosks, while stronger drinks could not. ‘Network effects’ in
beverage consumption – i.e. the fact that beverages are consumed in social settings and people’s
consumption patterns are influenced by those of their peers – acted as a multiplier effect in the growth of
beer consumption.
Sales of Beer in Russia 1995-2015 (mln deciliters)
Source: Rosstat

9
Regulatory advantage eliminated. Since the mid-2000s, beer has been subject to increasingly strict and
burdensome federal regulation, which has eliminated most of its earlier regulatory advantage over stronger
beverages. These include:
 Beer reclassified as alcohol. A major revision to Law 171 (the main law regulating the production
and sale of alcohol) officially reclassified beer as alcohol in 2011. This reversed the declassification
that took place in 1996. It meant that beer was regulated by Law 171 rather than by separate laws,
and could officially come under the auspices of the federal alcohol regulator RAR.
 Advertising. From 22 July 2012, beer could no longer be advertised on television, radio or
billboards/outdoors. In July 2014, the Russian parliament passed a law suspending these advertising
bans for beer until the end of 2018. This is linked to Russia’s hosting of the 2018 FIFA World Cup,
which has AB InBev’s Budweiser as one of its official sponsors.
 Reduced retail availability. From 1 January 2013, beer could no longer be sold in ‘non-stationary
retail outlets’ (i.e. kiosks and street stalls). Prior to this, such small-scale retailers could sell beer but
not wine or spirits. A complete ban on the sale of all alcoholic beverages, including beer, between
23:00-08:00 local time came into effect on the same date. Previously, regional governments had set
their own night time restrictions, and these tended to apply only to stronger beverages, not beer.
 Increased tax burden. In 2010, excise duty was increased threefold (i.e. 200 percent) on beer, while
the corresponding increase on strong alcohol was just 9.9 percent. There have been further above-
inflationary increases in subsequent years.
 Limitations on large containers. There have been repeated attempts to ban alcohol from sale in
PET containers (plastic bottles). This would impact most heavily on beer, as other forms of alcohol
are rarely sold in PET. In June 2016, a compromise law was passed, to take effect from January this
year, which banned alcohol from being sold in PET larger than 1.5 liters. This applied to 15% of all
beer produced in Russia.
 Connection to the Unified State Automatic Information System (EGAIS). Brewers have been
required to connect to the EGAIS system since 1 July 2016. This carries substantial implementation
costs. Efes, for example, estimated that it would need to spend over US$1 million to connect to
EGAIS. Once connected to EGAIS, brewers cannot use the same equipment to produce non-
alcoholic beverages. According to the Union of Russian Brewers, this affects 80 percent of brewers,
who produce around 50 percent of kvass (the popular Russian soft drink made from black bread)
and 40 percent of all non-alcoholic beverages on the Russian market. These companies will be
forced to either invest in new production lines, or to cease production of non-alcoholic beverages.
Brewers have expressed concerns about how accurately EGAIS can measure the volume of the
liquid given that beer ‘froths’.
 Threat of licensing. Unlike stronger beverages, beer is not currently subject to licensing of
production. The federal alcohol regulator RAR has been proposing extending licensing to beer
production more or less since the agency itself was established in 2009. Numerous proposals have
been rejected by the government, but the potential threat remains.

10
A glimmer of hope for beer? In November 2016, the Economy Ministry backed developed by the Higher
School of Economics in conjunction with the brewing industry, to return to beer being regulated separately
from stronger alcohol. The proposals included reversing some of the increased regulatory burden on beer of
recent years, including returning beer sales to kiosks and excluding beer from the night time ban on retail
alcohol sales. However, even with the Ministry’s backing, this proposal will face considerable opposition
from other government departments, notably RAR.
Baltika
Russia’s No. 1 beer brand. Baltika has been the leading brand on the Russian beer market since 1996.
Owned by Carlsberg Group and based in St Petersburg, the company currently has a market share of 34.7%.
Baltika contributes 16% of Carlsberg Group’s gross profits.
The beginning of a new era. The brewery was established as a state enterprise in 1990, one year before the
collapse of the Soviet Union. The Baltika brand of beer did not exist at this point; rather, the brewery
produced beers under well-known Soviet brands such as Zhigulovskoye. It was privatized into a joint stock
company in 1992, as part of the government’s wide-ranging program of privatization to transform Russia
into a market economy. Baltic Beverages Holding AВ (BBH), a Scandinavian holding company, which had
been formed specifically to invest in the countries of the former Soviet Union, became the major
shareholder and investor.
Regional expansion. Baltika embarked on a major program of regional expansion from 1997, acquiring
breweries in Rostov-on-Don (1997) and Tula (1998), and establishing others in Samara (2003), Khabarovsk
(2003), and Novosibirsk (2008). A regional sales network was built up from 1998. A merger with three other
Russian brewing companies in 2006-07 represented another major expansion.
Acquisition by Carlsberg Group. BHH (and thus Baltika) became jointly owned by Carlsberg and Scottish &
Newcastle in 2002. Baltika joined the Carlsberg Group in full in 2008, following the latter’s acquisition of
Scottish & Newcastle.
Adapting to market realities. A shrinking beer market in Russia and growing competition from smaller local
producers have forced Baltika to rationalize its operations. The company closed two of its production plants
(Krasnoyarsk and Chelyabinsk) in 2015.

11
Beverages: Strong alcohol
Falling sales. Recorded sales of strong alcohol have been consistently falling since 2004.
Large black market. The Russian vodka industry is characterized by a large black market. There are no
official state statistics on the illegal alcohol market in Russia, and it is difficult to estimate its true size.
Estimates vary by source and year, but a typical figure is that 50 percent of the spirits market is illegal.
Smaller producers dying off. Spirits production is significantly less consolidated than the brewing industry.
This is despite the fact that many smaller companies have been forced out of the market as a result of
increased regulatory activity from 2009, when the new federal alcohol regulator RAR was founded.
Structures of capital are often unclear and chains of ownership are complicated by opaque holding
companies, shell companies and offshores.
Preferential treatment for regional producers? Some producers have complained that regional authorities
use “administrative resources” to help local producers based in their region maintain their sales. Deputy
Prime Minister Khloponin has accused regional authorities of “quasi-subsidizing” local vodka producers. For
example, regional officials in Tatarstan have reportedly encouraged retailers to set artificially high prices for
vodkas imported from other Russian regions, while maintaining low prices for local Tatspirtprom vodka
(which became the leading Russian producer in 2016). The reason for such regional protectionism is that
40% of the excise duty paid by factories goes directly to the regional budget.
Fragmented brand landscape. Unlike Western markets, there is no major dominant vodka brand on the
Russian market. No brand has a market share of over 5%. Brand loyalty is weak, and brands can quickly rise
or fall in popularity. The former market leader Putinka – named after the Russian president – fell from fourth
place in 2015 to just 15
th
place in 2016, its market share falling a whole percentage point in a year to 1.36%.
Sales of Vodka and Spirits (excluding brandies) in Russia 1995-2015 (mln deciliters)
Source: Rosstat

12
Minimum pricing. Russia has had a minimum retail price for vodka since 2010. Although this policy has been
widely represented as inspired by public health concerns, it was heavily lobbied by legal vodka producers,
who saw it as a way to help prevent their products being undercut by illegal production.
A significant cut alters the market. In February 2015, the minimum vodka price was cut for the first time
since it was introduced some five years previously, by a substantial 35 rubles. This worked in favor of one
particular distributor – Status Group – which has an exclusive agreement with state-owned production and
has come to dominate the economy sector (see case study). Other major vodka producers have expressed
opposition to a minimum price below 200 rubles, claiming that it is not possible to produce a legal bottle of
vodka for retail sale at this price.
Tatar conquest. In 2016, Tatarstan’s Tatspirtprom took advantage of Status Group’s supply-side difficulties
to become Russia’s leading vodka distributor.
Import markets for non-vodka spirits. Import markets for non-vodka spirits enjoyed substantial growth
since 2000. Although the poor macroeconomic situation has hit imports badly, particularly in 2015,
prospects for import markets would likely rebound in the event of economic recovery. The rum segment
bounced back in the first half of 2016, showing an increase of 35% compared to the same period in 2015.
Market position Brand Company Market share Market share Change
Apr-May 2015, % Apr-May 2016, % 2015-16
1 Belen'kaya Synergy 4.31 4.51 0.2
2 Pyat' ozer Alcohol Siberian Group 4.64 3.54 -1.1
3 Khortitsa Global Spirits (Ukraine) 2.34 2.59 0.3
4 Medoff Eastern Alcohol Company 1.97 2.4 0.4
5 Gosudarstvennaya zakaz Synergy 1.51 2.35 0.8
6 Zelenaya marka Roust 3.53 2.32 -1.2
7 Kalina krasnaya Status Group 1.82 2.19 0.4
8 Dobriy medved' Status Group 1.98 2.13 0.2
9 Prazdnichnaya Kristall-Lefortovo 2.06 1.96 -0.1
10 Russkaya valyuta Tatspirtprom 0.87 1.88 1.0
Source: Nielsen
Top 10 Vodka Brands in Russia, 2015-16
Effective date Price (RUB)/0.5L
01 January 2010 89
01 January 2011 98
01 July 2012 125
01 January 2013 170
10 March 2014 199
01 August 2014 220
01 February 2015 185
13 June 2016 190
Source: Rosstat
Minimum Retail Price of Vodka, 2010-16

13
Import disruption only expected to be short-term. A deficit in the new type of excise stamps in summer
2016 led to dramatic falls in imports in Q3. Imports of whisky declined by 41%; rum by 61.4%; table wines by
25.6%; and sparkling wines by 13.4%. The new stamps were supposed to be issued from 1 July 2016, but a
bureaucratic hold-up meant that they only became available from the end of the summer. The situation had
little impact on the main multinational importers – Diageo, Bacardi and Pernod Ricard – who had foreseen
the potential crisis and bought up large stocks of the old stamps. Import resumed in Q4, with overall import
volumes for 2016 ending up similar to those of 2015.
Value of Imports, US$ mln
Source: Rosstat
Product 2013, mln liter 2014, mln liter 2015, mln liter Chg YoY 2015, %
Whisky 41.12 43.21 33.59 –22.3
Vodka 37.78 16.06 4.39 –72.7
Brandy 26.34 25.52 8.81 –65.5
Rum 7.68 7.32 4.76 –35.0
Tequila 4.29 3.42 2.63 –23.1
Table
wine
271.39 248.16 167.22 –32.6
Sparkling
wine
43.08 50.14 33.25 –33.7
Import Volumes by Product, 2013-15
Source: Federal Customs Service

14
Stolichnaya vodka
An iconic brand in a tug-of-war. Stolichnaya vodka is one of Russia’s most iconic brands, being one of the
few Soviet brands sold in Western shops during the Cold War. It has also been the subject of an ongoing
international dispute over the ownership of the trademark since 2001. Stolichnaya sold in most Western
countries is produced by SPI Group, owned by exiled Russian entrepreneur Yuri Shefler and based in
Luxembourg. Stolichnaya sold in Russia and the Benelux countries is produced by the Russian state-owned
enterprise Soyuzplodoimport.
A dodgy privatization. In 1991, the old Soviet monopolist vodka exporter which owned the rights to
Stolichnaya, Soyuzplodoimport, was privatized. Entrepreneur Yuri Shefler built up a stake in the company,
and became its president in 1997. In the same year, Shefler created a rival vodka exporter to that of which
he was president, with an almost identical name – Soyuzplodimport (i.e. minus the third ‘o’), abbreviated to
SPI for convenience. A few months later, Shefler sold the trademarks of Soyuzplodoimport's 43 leading
brands of vodka – including Stolichnaya – to his own SPI company for a nominal sum.
The state fights back. In May 2000, newly-elected president Vladimir Putin judged that there had been
discrepancies in the privatization, which rendered it illegal and a case of corporate theft. Masked police
stormed SPI’s Moscow headquarters and ransacked offices, confiscating documents and computers. The
Russian government unilaterally declared that it was repossessing the disputed vodka brands. In 2001, the
government created a new state-owned federal enterprise called (once again) Soyuzplodoimport, to contest
the rights to all disputed vodka brands and manage them once obtained. At the end of that year, the
Supreme Arbitration Court ruled that the privatization of the original Soyuzplodoimport had been illegal.
Accordingly, forty vodka brands – including Stolichnaya – passed to the new state-owned Soyuzplodoimport.
Pursuit of Stolichnaya and Shefler. In February 2002, Russian customs officers impounded US$10 million
worth of SPI vodka due to be exported to the US. SPI duly switched its production from Kaliningrad, Russia to
the Latvijas Balzams distillery in Riga, Latvia. The Russian government asked Western distributors to boycott
SPI, on the grounds that the disputed vodka brands now belonged to the Russian state. A warrant was issued
for Shefler’s arrest in July 2002. Shefler fled to Europe, moving SPI with him. Soyuzplodoimport has
challenged SPI’s right to use the Stolichnaya brand in several international courts, winning a case in the
Netherlands in 2006. Russia had an extradition request for Shefler refused by the UK in 2010.
Status Group
From out of nowhere. Status Group was established in 2012. In December 2014/January 2015, the company
had around 5.3% of the market by sales volume. By June/July 2015, its market share stood at 13.1% – an
increase of nearly 250% in just six months. In 2015, Status Group more than doubled its sales of vodka and in
November of that year had 18.4% of the market in terms of volume, and 15.1% in terms of monetary value.
A convenient minimum. Status Group’s dramatic rise in the market was enabled by the unexpected
reduction in the government’s statutory minimum retail price for vodka, which was dropped from 220 to
185 rubles in February 2015. Status Group was the only distributor capable of supplying vodka that could be
sold as low as 185 rubles.

15
Brand growth in the economy segment. In 2015, Status Group’s most popular vodka brands, which it sold at
the legal minimum vodka price of 185 rubles for 0.5L, increased their market share in terms of volume
considerably:
Dobriy Medved – from 1.15% to 4.02%
Kalina Krasnaya – from 1.02% to 3.72%
Staraya Marka – from 1.18% to 3.28%
Public-private partnership. Status Group is the exclusive distributor for brands of vodka owned by the state-
owned companies Rosspirtprom and Soyuzplodoimport.
Mystery ownership. The ownership of Status Group is shrouded in mystery. Some market participants have
claimed that the end beneficiary is Vladimir Putin’s billionaire friend, Vasily Anisimov. Anisimov himself has
denied this. Managers from the formerly Anisimov-owned alcohol distribution company VEDK work in key
positions in Status Group.
Some kind of miracle? Valentina Matvienko, the speaker of Russia’s upper house of parliament, publicly
raised concerns in November 2015 about how Status Group had managed to achieve such rapid growth in
the market: “How is it that our number one exclusive distributor, registered offshore, is growing at such a
great rate of knots? What is this, some kind of miracle?”
2016 difficulties. Status Group ran into serious supply difficulties in 2016 which affected its market position.
The Russian authorities closed several alcohol factories in the Kabardino-Balkaria Republic on the grounds of
excise duty evasion. Many of these factories had been major suppliers for Status Group: its competitors
alleged that it was precisely the excise duty evasion that enabled the company to undercut its rivals. The
closures led to supply shortages of Status Group vodkas to retailers. Status Group tried to transfer
production of its Rosspirtprom vodkas to Tatarstan-based Tatspirtprom, but the deal fell through.

16
Beverages: Wine
Wine sales show resilience. Wine sales enjoyed a period of steady long-term growth over the period 2000-
10. After three consecutive years of decline in 2011-13, wine sales showed moderate recovery in 2014.
Although they dipped again slightly in 2015, this represented a robust performance in view of reduced
consumer purchasing power.
Import markets. Import markets for foreign wines enjoyed a period of sustained growth since 2000. The
peak was in 2013. The adverse macroeconomic climate saw a small reduction in import volumes in 2014,
followed by a larger fall in 2015. Russia dropped from fifth to seventh place in the world’s biggest import
markets for wine in 2015. The first half of 2016 showed a slight recovery, with import volumes of table wines
up by 10% on the same period in 2015.
A growing market for domestic wines. Russian wine production grew by an impressive 14.3% in 2015
compared to 2014. The largest Russian wine producer, Ariant, increased its production by 48% in 2015. As
well as the weak ruble increasing the price of imported wine, economic sanctions imposed by the
international community against Russia may have contributed to this new-found enthusiasm for Russian
wine. Although the sanctions barring the export of certain goods to Russia did not extend to alcohol, they
have served to stimulate interest in locally-produced goods.
Shared responsibilities. In 2014, wine was recognized in Russian law as an agricultural product, alongside
the existing designation of an alcoholic product. This meant that responsibility for the industry became
shared between the alcohol regulator RAR and the Ministry of Agriculture, whereas previously it had
belonged exclusively to the former.
Sales of Wine in Russia, 1995-15
Source: Rosstat

17
Proposed government support for domestic winemakers. In 2016, the Ministry of Agriculture developed a
draft program for encouraging the development of wine production in Russia. If adopted by the
government, the policy would aim to stimulate the growth of wine production through support for small and
medium enterprises. This would include simplifying the licensing requirements for small wineries, and
subsidies for planting vineyards and the purchase of agricultural machinery. The Ministry of Agriculture
proposed that over 90% of the estimated US$49.3 billion investment required would be funded by the
federal budget. However, this policy is still in the draft stages and is subject to inter-departmental
agreement as well as government approval of the required funding.
Some preferential treatment already exists. Domestically-produced wine currently enjoys advertising
preferences over foreign wine and stronger drinks. Unlike its foreign competitors, Russian wine can be
advertised on television during night-time hours (11pm-7am local time), and on the inside pages of print
media.
Acquisition of Crimea. In March 2014, Crimea was absorbed into the Russian Federation after a
controversial referendum. Viticulture plays a central role in the Crimean economy. This includes the
production of so-called ‘Soviet champagne’, a sparkling wine ‘for the masses’ that was devised during the
Stalin era, and remains a popular drink for Russian celebrations.
Prestige and patriotism. Crimean viticulture is currently a popular area for investment by Russian elites, due
to the prestige associated with owning a winery and the perceived patriotism of being seen to invest in the
newly-Russian territory. Ownership is not always transparent, partly due to the risk of any investor in Crimea
having international sanctions applied against them.
Restricted markets. Due to international sanctions following the Russian annexation of Crimea, Crimean
wine cannot be sold on Western markets or entered into international competitions, which limits export
markets.
Massandra
A world-renowned winery. Massandra, located near Yalta, is the oldest and most prestigious winery in
Crimea. Construction of the winery was completed in 1897. Its collection contains some of the oldest and
most valuable wines in the world, which are listed in the Guinness Book of Records. Massandra escaped the
widespread uprooting of vineyards that took place under Mikhail Gorbachev’s anti-alcohol campaign (1985-
88).
From Ukraine to Russia. Massandra formally belongs to the Ukrainian government, but ownership of it has
de facto been lost along with the territory of the Crimea. It is now under the management of Russian
officials. Its products are subject to Western sanctions, but as its export market was concentrated on Russia
in any case the effect is unlikely to be too adverse.
No stranger to controversy. Russian president Vladimir Putin and former Italian prime minister Silvio
Berlusconi caused controversy in September 2015, when they toured the winery and allegedly uncorked a
bottle of 1775 Jerez de la Frontera worth more than US$90,000. In December 2015, Massandra
controversially auctioned around 13,000 vintage wines from the Soviet period. The Ukrainian government
condemned the sale as illegal. International buyers risked sanctions being applied against them.

18
The Russian state’s presence in the alcohol market
Possibility of a state monopoly
Historical precedents. Russia has a long history of state monopolies on alcohol. The tsarist regime operated
a retail monopoly on vodka from 1895. As a communist regime, the USSR had a monopoly on the production
and sale of all alcoholic beverages. This was ended in June 1992 by Yeltsin’s market reforms. Yeltsin’s
government quickly regretted surrendering control over the alcohol market, and made several attempts to
restore some kind of state monopoly on alcohol from 1993 onwards. However, it proved impossible to ‘put
the genie back in the bottle’, and these attempts ended in failure.
A topical political issue. The possibility of establishing a state monopoly on alcohol is a regularly recurring
subject in Russian political discourse. It is typically a monopoly on the production of ethyl alcohol that is
referred to, although political actors do not always make clear the exact kind of state monopoly they have in
mind. Both the Agriculture Ministry and President Putin publicly advocated a state monopoly in 2005.
However, in subsequent years Putin changed his mind and came out against a state monopoly. In 2009,
President Medvedev instructed the government to ‘consider the consequences’ of introducing a state
monopoly on the production and circulation of ethyl alcohol and alcoholic products. However, the
government decided against the idea.
Pure alcohol monopoly now looking likely. In December 2015, Deputy Prime Minister Alexander Khloponin
stated that establishing a state monopoly on ethyl alcohol production should be a government priority.
Rosspirtprom’s recent acquisition of several ethanol plants would appear to be an unofficial step towards
such a monopoly.
Rosspirtprom
State-owned alcohol production. Rosspirtprom is a state-owned holding company for alcohol production. It
was created in 2000 by a decree of President Putin. All government shareholdings in alcohol companies
were brought under the management of this single state-owned holding company. Alcohol enterprises that
were already wholly state-owned were made into subsidiaries of Rosspirtprom. The government had to fight
to regain control over many of these assets – both through legal measures and other methods.
Centralized control. Rosspirtprom had a political purpose: to restore the ‘power vertical’ (centralized federal
control) over the regional governors who had exercised great power under Yeltsin. The regional governors
were heavily dependent on alcohol revenues, so placing those revenue streams under federal control was
essential for the Kremlin’s establishment of the power vertical.
Poor management and unprofitability. Rosspirtprom has been consistently unprofitable and debt-ridden. In
2006 its parent ministry, the Ministry of Agriculture, was forced to agree to a one-off rise in its debt limit so
it could take out a five million ruble loan from the state-owned bank VTB. It was forced to repay the debt not
in money, but in factories (a de facto privatization). The company has suffered from allegations of poor
management and asset stripping throughout its history.

19
Falling market share. In 2000, Rosspirtprom controlled 30% of the vodka and spirits-producing industry, and
50% of the ethyl alcohol-producing industry. This included a number of the country’s most valuable vodka
plants, such as the prestigious Moscow Kristall distillery. In the course of a decade its market share fell
dramatically: in 2010, it only had around 10% of the vodka market (although this still made it Russia's
second-largest vodka producer). By 2015, this market share had shrunk still further, to 1.1%.
Monopolist ambitions to be fulfilled at last? Although it was never publicly stated, much of Rosspirtprom’s
policy activity in the mid-2000s was de facto directed at awarding itself the status of ethyl alcohol
monopolist (the raw ingredient from which vodka is made). However, these attempts were unsuccessful. In
2016, the state-owned company announced that it would cease vodka production to concentrate on the
ethyl alcohol market. It took out credit to purchase several ethyl alcohol plants, increasing its share of that
market to around half. In view of Deputy Prime Minsiter Khlopolin’s statements supporting a state
monopoly on ethyl alcohol production, it appears that Rosspirtprom may be preparing itself for such a role.

20
The federal alcohol regulator
Several regulatory and tax changes came into effect on 1 January this year. See Appendix 1 for the summary.
Birth of a ‘mega-regulator’. Alcohol policy and regulation is overseen by the Federal Agency for Regulating
the Alcohol Market – short name Rosalkogolregulirovaniye, commonly abbreviated to RAR. This body was
created in 2009, and brought together the various aspects of regulating the alcohol market under one
‘mega-regulator’. In early 2016, RAR lost its bureaucratic independence and was brought under the control
of the Ministry of Finance.
Both policymaker and regulator. RAR is responsible for developing government policy to reduce
consumption and ensure order in the alcohol market. It also fulfils regulatory functions: issuing and revoking
licenses and operating the EGAIS monitoring system. EGAIS (the Unified State Automatic Information
System) records the amount of ethyl alcohol used and produced by manufacturers, including its volume and
concentration. All production facilities are required to obtain the necessary electronic recording equipment
to feed into EGAIS, which allows records to be automatically collected and sent to the centralized
information system.
An enigmatic chief executive. RAR has been headed by Igor Chuyan since its foundation in 2009. Chuyan
had previously worked in the state alcohol conglomerate Rosspirtprom since 2002, and was its director
general for 2.5 years before becoming chief executive of RAR. In November 2015, Russia’s upper house of
parliament, the Federation Council, instructed the Anticorruption Committee to investigate Chuyan for
alleged informal connections with the alcohol business. No results of this investigation are yet in the public
domain, and Chuyan remains in post.
A hidden agenda? Some market commentators have suggested that RAR is acting to artificially consolidate
the alcohol market, to the benefit of Rosspirtprom and companies belonging to other privileged individuals.
When RAR was established at the start of 2009, there were 317 companies producing alcoholic beverages in
Russia (excluding beer). By January 2016, this figure had fallen to 189.
Excessive administrative burdens. RAR has faced criticism from a number of market participants for making
unnecessarily burdensome administrative demands and establishing licensing requirements that are almost
impossible for all but the largest producers to meet. A review of cases conducted by Russian lawyers found
that RAR repeatedly exceeded its powers by trying to impose licensing requirements that had no basis in
law. They concluded that alcohol licensing laws, ‘are being implemented on the basis of unlimited
administrative discretion bordering on tyranny.’
Censure from the Anti-Monopoly Service. Within the federal bureaucracy, RAR has repeatedly been
censured by the Federal Anti-Monopoly Service (FAS) over the former’s regulatory activities and their effect
on competition in the alcohol market. It remains to be seen how being brought under the control of the
Ministry of Finance will affect RAR’s operation.

21
State’s informal influence in the alcohol market
Informal governance. The role of informal networks in Russia important for understanding the workings of
state institutions connected with alcohol, such as Rosspirtprom and RAR. One of regime’s preferred
methods of governance is to entrust important posts to friends or former colleagues or others who are
trusted. As a result, major parts of Russia’s strategic national industries, including oil, gas, and alcohol, are
now owned or managed by people who are part of this trusted group, if not actually part of the president’s
inner circle.
The Rotenberg brothers. The brothers Boris and Arkady Rotenberg have close links with Rosspirtprom.
Many Rosspirtprom alcohol plants kept their accounts with the Rotenberg-owned banks SMP and MBTS. The
Rotenbergs are widely perceived by Russian alcohol policy insiders as possessing informal policy influence,
though this is of course difficult to prove.
Vasily Anisimov. In 2009, Vasily Asimov founded the East European Distribution Company (VEDK), and soon
after purchased a number of state-owned alcohol factories (including Moscow’s prestigious Kristall distillery)
in what was effectively an unofficial privatization. VEDK’s best year was 2013, when its revenues were 38
billion rubles. Anisimov later sold the company and it went into liquidation in March 2016. Some market
participants have claimed that Anisimov is the end beneficiary of Status Group, which came from nowhere
to be the market leader in 2015. Anisimov himself denies being the owner of Status Group. Managers from
the formerly Anisimov-owned VEDK company work in key positions in Status Group.
State anti-alcohol policy
‘A national disaster’. In August 2009, the Russian government launched a new initiative to reduce alcohol
consumption, which was personally overseen by President Medvedev. Medvedev famously stated: ‘You
know just how serious a problem alcoholism has become for our country. Frankly speaking, it has taken on
the proportions of a national disaster.’ The government’s concept document on measures to reduce alcohol
consumption was published in December 2009.
Cause, or pretext? 2009-11 was a period of heightened policy activity with regard to tightening the
regulation of alcohol’s production and sale. This culminated in the passage of a major law on alcohol
regulation in 2011. However, it is important to understand that although the anti-alcohol initiative was the
occasion for this heightened policy activity, it was not the ultimate determinant of the policy details. Rather,
these details were a perpetual battleground between the numerous policy stakeholders, including vodka
and beer lobbyists and their respective backers in government departments. In short, in many cases the
“anti-alcohol campaign” was a pretext for new regulations, rather than the true cause.

22
Regional restrictions
Federal system. Like the US, Russia has a federal system of government. There have been 83 federal
subjects since a merger process of some smaller subjects was completed in 2008. In 2014, the Russian
Federation constitutionally adopted Sevastopol and the Republic of Crimea as the 84
th
and 85
th
federal
subjects. The federal system means that some regulation of alcohol takes place at the regional as well as the
federal level.
Tighter restrictions on retail sale. Over 60 of the 83 federal subjects already had some kind of restrictions
on the sale of alcohol at night, prior to the new federal law of 2011 which introduced a nationwide ban
between 11pm and 8am. Although the federal law provides the minimum restriction, regional governments
have the right to introduce stricter restrictions should they choose – and many have done so. For example,
St Petersburg has a longer night time ban of 10pm – 11am. The tightest restriction is in Chechnya, where
alcohol can only be sold for two hours a day, between 8am – 10am.
Some regions willing to raise minimum drinking age to 21. The legal drinking age in Russia is 18. However,
some regional governments have indicated they are prepared to establish a higher age of 21 on their
territories – an initiative being pushed by the Russian Public Chamber’s health committee. However, no
federal subject has yet instituted such a change.
Eurasian Economic Union (EAEU)
A ‘post-Soviet EU’? The Eurasian Customs Union (ECU) was established in 2010 between Russia, Belarus and
Kazakhstan, and became the EAEU in 2014. Armenia and Kyrgyzstan were admitted as members in 2015. In
institutional terms, the EAEU is in its infancy, and it is not yet clear if and how it will work in practice. It can
be compared to the European Union (EU) in that it provides an additional, supranational layer of legally
binding regulation. It is thus an additional site for lobbying battles. Unlike the EU, the fact there are currently
only five member states means that representatives from individual countries will be able to exert greater
influence over union regulations. Russia as the largest member is likely to have the greatest influence.
Proposed regulation stuck in limbo. A draft technical regulation (tekhreglament) entitled ‘On the safety of
alcoholic products’ has been in negotiation within the ECU/EAEU since 2011. One of the sticking points is a
proposed ban on selling alcohol in PET (plastic). Kazakhstan is in favor of a union-wide PET ban, as it has had
such a ban in place at the national level since 1998. Belarus, however, sells a large proportion of beer in PET.
For now, the wrangling over the technical regulation continues.
CIS-Eurasia States 2016
Population mln GDP, nominal GDP p/Cap
US$ bln PPP basis US$
Armenia 3.1 $10.5 $7,907
Azerbaijan 9.7 $53.1 $16,695
Belarus 9.5 $47.4 $16,621
Georgia 3.7 $14.3 $9,109
Kazakhstan 17.9 $139.0 $10,617
Russia 146.0 $1,300.0 $23,895
Turkmenistan 5.4 $35.9 $15,527
Ukraine 42.6 $90.0 $16,621
Uzbekistan 32.1 $66.7 $5,716
Source: World Bank, Macro-Advisory Ltd

23
Appendix 1: New alcohol regulations from 1 January 2017
Several new laws regulating the Russian market of hard liquor (strong spirits) came into effect on 1 January,
2017.
As of 1 January, 2017, under the law on amendments to parts 1 and 2 of Tax Code and specific legislative
acts of Russian Federation for the planning period of 2017-19, excise duties on most of alcoholic drinks have
been raised.
In particular, the government is raising excise duty on champagne, produced from imported ingredients, by
10 rubles ($0.10) to 36 rubles ($0.60) per liter.
Excise duty on champagne produced from Russian grapes won’t be raised higher than it was envisaged in
the previous version of the Tax Code to 14 rubles ($0.20) per liter.
Excise duty on wines made from Russian ingredients will remain unchanged at 5 rubles ($0.08) per liter.
Excise duty on wines made from foreign ingredients has been raised from 9 rubles ($0.10) to 18 rubles
($0.30) per liter.
Excise duty on cider, poiret (cider-based on pear mash), and mead will grow from 9 ($0.10) to 21 rubles
($0.30) per liter during the period of 2017-19.
Excise duties on beer with alcoholic content between 0.5% and 8.6% and beer with alcoholic content above
8.6% will grow from 20 to 21 rubles ($0.30) per liter and from 37 to 39 rubles ($0.6) per liter, respectively.
In 2017-19, excise duties on hard liquors (drinks with alcoholic content above 9%) will be raised from 500
($8.20) to 523 rubles ($8.60) per liter, as well as on alcohol with average alcoholic content (below 9%) - from
400 rubles ($6.60) to 418 rubles ($6.80).
On 1 January, 2017, the law restricting sales of alcoholic drinks in PET (plastic) bottles comes into effect. It
bans production and sales of alcoholic products in in PET (plastic) bottles having more than 1.5 liters in
capacity.
Retail sales of alcoholic drinks in PET bottles will be banned starting 1 July, 2017.
From 1 January, 2017, any alcoholic beverages produced in PET (plastic) bottles with the capacity of more
than 1.5 liters will be subject to a fine of 100,000 rubles to 200,000 rubles ($1,644 -3,288) for individuals and
from 300,000 to 500,000 rubles ($4,929 - $8,215) for legal entities.
It is already clear that the whole volume of manufactured alcoholic drinks will not be redistributed among
the other types of packaging: 15-20% of Russian-produced beer is bottled in plastic containers larger than
1.5 liters.

24
Appendix 2: Economic backdrop
Retail sectors are still struggling. The economy returned to growth in Q4 last year after suffering seven
straight quarters of contraction. The overall contraction in 2016 was modest, at minus 0.2%, and this year
growth of 1.0% is expected. However, there is a divergence between the trend in the consumer sectors and
those benefitting from the weak ruble and import substitution. It means that the former suffered a much
deeper recession than the latter and will be slower to recover. For example, retail sales dropped 10% YoY in
2015, fell by over 5% YoY in 2016 and are expected to show growth of only 2% this year. The longer term
picture for the economy, and for the consumer sectors, is in Appendix 5. It shows a modest but steady pick-
up in retail over the next ten years as disposable incomes also grow slowly.
The consumer sector boom years are over. But a return to a more stable and predictable growth of 5-6% per
annum by the early part of the next decade is expected.
Old growth model has matured. Localization has emerged as the government’s strategy to create another
growth driver in the economy, in fact, the main driver of growth over the next decade. The previous driver
of the boom, from 2000 to 2012, was the result of a combination of trickle down oil wealth, increasing
budget spending, consumer expansion and the low base effect. That started to slow from 2H12 and while
still forming the base of the economy that combination is now capable of returning annual growth to the
targeted 4.0% level, even if the price of oil were to return to the previous average of US$110 per barrel.
Russia: Macro Trends & Medium Term Forecasts - Base Case Scenario
2012 2013 2014 2015 2016E 2017E 2018E 2019E
GDP, RUB bln, nominal 62,511 63,800 70,970 81,530 87,074 92,386 97,929 104,098
GDP, US$ bln 2,010 2,000 1,850 1,315 1,300 1,490 1,554 1,627
Growth, real % YoY 3.4% 1.3% 0.7% -2.8% -0.2% 1.0% 1.5% 2.0%
CPI - year-end, % YoY 6.6% 6.5% 11.4% 12.9% 5.4% 4.0% 3.8% 3.6%
CPI- average, % YoY 5.1% 6.8% 7.8% 15.6% 7.2% 4.1% 3.9% 3.8%
Gross fixed investment, real % YoY 6.0% 0.9% -1.0% -10.0% -1.0% 2.0% 3.5% 4.0%
Industrial production, real % YoY 3.4% 0.4% 1.7% -3.2% 1.1% 2.0% 3.0% 4.0%
Agricultural output, % change YoY -3.6% 3.1% 1.2% 3.5% 4.8% 2.8% 3.0% 3.2%
Central Bank Key Rate, % 17.0% 11.0% 10.0% 8.5% 7.0% 6.0%
Bank average lending rate, % 9.1% 9.5% 11.3% 16.0% 13.0% 10.0% 8.5% 7.5%
Retail sales, % YoY 5.9% 3.9% 2.5% -10.0% -5.2% 2.0% 3.0% 4.0%
Real disposable income, % YoY 7.3% 4.8% -1.0% -6.5% -5.9% 1.0% 2.0% 3.0%
Unemployment, % EOP 5.7% 5.6% 5.3% 5.6% 5.3% 5.5% 5.4% 5.3%
Budget, balance % of GDP 0.0% -0.5% -0.5% -2.4% -3.5% -2.3% -1.5% 0.0%
Current account, % GDP 3.7% 1.6% 3.0% 5.3% 1.7% 1.9% 1.9% 2.0%
RUB/US$, year-end 30.8 32.9 61.4 73.5 61.3 62.0 64.0 66.0
RUB/US$, average 31.1 31.9 38.6 62.0 67.0 59.0 63.0 64.0
RUB/EUR, year-end 40.3 45.3 72.0 79.7 64.5 65.0 68.0 70.0
RUB/EUR, average 40.0 42.3 51.5 67.0 74.0 62.0 65.0 68.0
Urals, US$ p/bbl, average $110 $108 $100 $54 $45 $54 $65 $75
Source: State Statistics Agency, Central Bank, Macro-Advisory estimates

25
First emerged in 2013. The fact that this point of change had arrived in the economy was first acknowledged
by President Putin in late 2013 (it was the subject of his Federal Assembly Address in December 2013) but
any strategies to address it were side-lined by the events in 2014.
Crisis has forced the change faster. The sanctions and the rapid oil price collapse, both from August 2014,
have made the government address this issue of localization and the need for a new growth driver more
seriously than would otherwise have been the case if the oil price had stayed high. In other words, while the
crisis stalled the initial planning, the effects of the crisis have helped clarify the issue and placed localization
as a greater priority earlier than would otherwise have been the case.
Import substitution has broadened. Initially, the strategy was very focused on import substitution, i.e. to
off-set the shortages and perceived vulnerabilities, caused by the sanctions and the ruble collapse. This was
the mantra from nationalist politicians in 2014 and early 2015. But from spring 2015, this started to change.
Government officials started to talk about Localization as not only a policy to replace imports but also as
part of a plan for Russia to attract more investment into manufacturing and thus to both boost export
volumes/values and to diversify exports (still heavily dominated by hydrocarbons – 66% – other extractive
industries – 15% – weapons and grain – 11%).
Russia Retails Sales, % Change YoY
Source: Federal State Statistics Service

26
Appendix 3: Improving demographic trends in Russia
Russia has recovered from the disaster of the 1990s. Despite the widely held view of the 1990s that Russia
was a “dying nation,” the country today possesses demography that is broadly similar to that of most other
European countries. While the 1990s, which saw a simultaneous decrease in births and increase in deaths,
were a genuine disaster, to relatively little fanfare the past decade has seen significant improvement across
a broad range of indicators. The improvements that have occurred since 2006 include large increases in
fertility and even more substantial decreases in mortality. Additionally, unlike many other countries in
Eastern Europe, Russia has demonstrated a proven ability to attract migrants, cumulatively adding several
million residents of other post-Soviet states to bolster its labor force and its population growth.
Population to grow, slowly. As with all countries there is a significant degree of uncertainty about future
demographic prospects, and a wide range of possible outcomes. However, the most likely current forecasts
suggest that, over the next fifteen years, Russia will experience a modest level of population growth while at
the same time seeing a modest decline in the size of its labor force. If this scenario comes to pass
demography will, on a net basis, be a slight drag on economic activity; however, it will certainly not be any
kind of a crisis.
Workforce to decline until early 2020s. One inescapable problem is the decline in the workforce. This is the
result of a low birthrate in the late 1980s and 1990s. The decline will only level out in the early 2020s. In
anticipation of this, businesses are hoarding labor, which is one reason for the low levels of unemployment
despite the recent severe recession.
Migration to the rescue? Russia is today a net recipient of migration. This is mainly younger workers from
the former Soviet Union. However, there is also a net positive migration inflow from outside the former
Soviet Union. Although there were small outflows in 2014-15, early 2016 data suggests that Russia is again a
net recipient of migrants.
Russia's Improving Demographics
1999 Current** 2030E
Total population, millions* 147.5 144.0 147.3
Urban based, % of total 73.8% 74.1% 75.0%
Rural bases, % of total 26.2% 25.9% 25.0%
Workforce, millions *** 86.3 85.4 79.2 - 86.0
Retirement age, men, years 60 60 65
Retirement age, women, years 55 55 63
Life expectancy, men, years 55.9 65.9 67.5
Life expectancy, women, years 72.4 76.7 78.4
Total Reproduction Rate (TPR) 1.2 1.8 1.9
Source: Federal Statistics Service, Centre for Strategic Initiatives, Macro-Advisory estimates
* all numbers exclude Crimea, which currently has a population of 2.3 million
** either end-2015 or 2016 average-to-date
*** the 2030E range is explained on page 12

27
Brain drain is a problem. Compelling anecdotal evidence, again apparent since the start of the current crisis
in early 2014, suggests that people with transferable skill-sets and savings have been leaving the country in
significant numbers. While on a net basis the country has been attracting people, the big fear is that the loss
of skilled white-collar workers, and their families and savings, will be a drag on economic recovery and
medium-term growth.
Pension reform will boost the workforce. The workforce is also likely to be boosted shortly by the raising of
the pension age. This is mandated by the need to cut budget outlays on pensions, but Russia is fortunate in
that there is room in the workforce for these workers. The higher pension age is expected to be fully
implemented after Putin is re-elected in 2018. The new pension ages will be part of his program.
Regional differences. The extent to which Russia’s population has rebounded differs dramatically on a
region-by-region basis. Some cities such as Moscow and Saint Petersburg are now more populous than they
have ever been. Other areas, such as Nizhny Novgorod or the Far Eastern Federal District, continue to
experience uninterrupted population decline. These regional disparities are likely to grow in significance in
the coming years.
Russia's Age Distribution *
Below 15 years 17.0%
Between 15 and 25 10.4%
Over 65 years 20.3%
Source: Federal Statistics Service
* of the total population as at end-2015
Population Of Russia's Ten Largest Cities
City 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Moscow 10,425 10,443 10,470 10,509 11,514 11,541 11,613 11,980 12,108 12,198
St Petersburg 4,581 4,571 4,568 4,582 4,849 4,899 4,953 5,028 5,132 5,192
Novosibirsk 1,397 1,392 1,397 1,409 1,443 1,475 1,499 1,524 1,548 1,567
Yekaterinburg 1,308 1,315 1,323 1,332 1,344 1,376 1,390 1,396 1,412 1,428
Nizhny Novgorod 1,284 1,278 1,275 1,273 1,261 1,251 1,255 1,260 1,264 1,268
Kazan 1,143 1,139 1,135 1,135 1,150 1,165 1,169 1,172 1,172 1,206
Chelyabinsk 1,113 1,116 1,120 1,131 1,137 1,144 1,161 1,176 1,191 1,183
Omsk 1,139 1,135 1,131 1,129 1,141 1,154 1,157 1,161 1,166 1,174
Samara 1,083 1,092 1,093 1,094 1,112 1,130 1,144 1,156 1,169 1,172
Rostov 1,055 1,052 1,049 1,049 1,068 1,090 1,097 1,104 1,110 1,115
Source: Russian State Statistics Committee

28
Appendix 4: Ruble to remain competitive
Oil price and ruble have always been close. Historically, the ruble exchange was heavily influenced by the
oil price. The correlation between the two was very tight right up to March 2015. In that month, the
relationship changed and will no longer be allowed return to the previous status quo.
But no longer. What we know today is:
 The Central Bank effectively killed, or greatly subdued, the local FX market in Moscow from early
2015 (as a result of the extreme volatility in December 2014). It means that the Central Bank can
now better control the FX market without having to intervene and spend a lot of money.
 The Central Bank is fully independent but clearly takes “key priority guidance” from the Kremlin
Administration.
 That “guidance” has been made very public by President Putin. He does not want to see the ruble
strengthening against the US dollar because a weaker for longer ruble is now at the very core of the
localization strategy. It is the key to maintaining a competitive economy and Putin was very public
in his commitment to a weak ruble during the last St. Petersburg International Economic Forum. He
promised industrialists that the government would not allow the ruble to strengthen even if / when
the oil price rallies.
 The Finance Ministry’s budget policy is based on the so-called Fiscal Rule. This means that it intends
to try and get the Federal Budget to balance at US$40 per barrel average oil price. It will use any
revenues earned in excess of the US$40 per barrel level to convert into FX and to rebuild the
Reserve Fund. This process will also ensure that the ruble will be contained at the RUB60/US$ level
(approx.) even if the oil price moves much higher.
Weaker for longer ruble. What it means:
 If the oil price were to weaken from current levels then the ruble would be allowed fall directly with
the weakening oil price. If, for example, the price of Brent crude were to drop to US$40 per barrel
(today it is US$52 p/bbl) then the ruble would be allowed fall to approximately 70.0 against the US
dollar. Zero intervention from the Central Bank.
 But, as we have already seen, as the oil price rises, the new administrative procedures will mean
the ruble exchange rate holding in the 58-60/US$ range.
 If the old system of a fully free floating ruble was still in place then at the oil price of US$55 per
barrel the ruble-dollar rate would be closer to RUB50/US$.

29
Since 1Q15 everything changed. This graph shows the RUB-USD and Brent relationship from early 2015
when the Central Bank changed its policy. There is still a close relationship when oil falls (4Q15) but not
when the oil price rises (recent months).
MinFin’s very conservative oil price assumptions. The Finance Ministry has deliberately constructed its
three-year (2017-19) budget with very conservative assumptions, such as an assumed US$40 average oil
price. That is now considered excessively low and will likely be revised in mid-2017. The assumed year-end
Ruble-Dollar rate of 67.50 is also, as a result, too low and will be raised with a higher oil price.
A strong ruble would kill localization … so can’t be allowed. But, bearing in mind that Putin has placed the
weak ruble at the core of efforts to maintain a competitive economy and to attract inward investment (for
import substitution and to drive new exports), the Central Bank will have to make every effort to keep the
ruble close to the 60.0 level even as/if the oil price rises. That probably means that, should oil reach US$70
per barrel (unlikely before 2018) the ruble-dollar rate should stay in the “high 50s” rather than plunge back
to the US$40s, or lower, per barrel. That would kill localization and, therefore, will be prevented.
Finance Ministry Federal Budget Macro Assumptions 2017-19
Average Oil Inflation RUB/USD GDP Growth GDP Nominal
US$ p/bbl Average YoY eop % YoY US$ bln
2016E $45.0 7.5% 63.0 ₽ -0.6%
2017E $40.0 4.0% 67.5 ₽ 0.6% -$1,273
2018E $40.0 4.0% 68.7 ₽ 1.7% -$1,363
2019E $40.0 4.0% 71.1 ₽ 2.1% -$1,289
Source: Finance Ministry, Macro-Advisory estimates

30
Appendix 5: Russia ten-year macro forecasts
Russia Long Range Macro Forecasts
2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Key Indicators
GDP, RUB bln, nominal 70,970р. 81,530р. 87,074р. 92,386р. 97,929р. 103,609р. 110,758р. 118,843р. 127,637р. 137,593р. 148,463р. 159,152р.
GDP, nominal, US$ bln $1,850 $1,315 $1,300 $1,490 $1,554 $1,627 $1,758 $1,948 $2,092 $2,219 $2,395 $2,609
Growth, real, % YoY 0.7% -2.8% -0.2% 1.0% 1.5% 2.0% 3.0% 3.5% 4.0% 4.3% 4.5% 4.0%
Industrial production, real, % YoY 1.7% -3.2% 1.1% 2.0% 3.0% 4.0% 5.0% 4.0% 3.5% 4.0% 3.5% 3.0%
Private consumption, real, % YoY 1.0% -6.5% 1.5% 3.0% 2.5% 3.5% 5.0% 5.0% 6.0% 5.5% 5.0% 5.0%
Gross fixed investment, real, % YoY -1.5% -10.0% -1.0% 2.0% 3.5% 4.0% 6.0% 7.0% 7.5% 8.0% 6.0% 5.0%
Agriculture output, % change YoY 1.2% 3.5% 4.8% 2.8% 3.0% 3.2% 4.5% 4.0% 3.5% 3.3% 3.0% 3.0%
Retail sales, % YoY 2.5% -10.0% -5.2% 2.0% 3.0% 4.0% 5.0% 5.5% 6.0% 7.0% 6.5% 6.0%
Budget balance, % of GDP -0.5% -2.4% -3.5% -2.3% -1.5% 0.0% 0.5% 0.5% 0.0% -0.5% -0.5% -0.5%
CPI - year-end, % YoY 11.4% 12.9% 5.4% 4.0% 3.8% 3.6% 4.0% 3.5% 3.3% 3.8% 3.0% 3.4%
CPI - average, % YoY 7.8% 15.6% 7.2% 4.1% 3.9% 3.8% 3.9% 3.8% 3.4% 3.5% 3.4% 3.2%
PPI - year-end, % YoY 5.9% 11.0% 7.5% 6.0% 5.0% 5.0% 5.2% 5.4% 5.0% 4.8% 4.8% 5.0%
PPI - average, % YoY 5.5% 7.0% 6.5% 7.5% 6.0% 5.0% 5.1% 5.3% 5.2% 4.9% 4.8% 4.9%
Commercial Bank Rates
Lending, average, % 11.3% 16.0% 13.0% 10.0% 8.5% 7.5% 6.5% 6.0% 5.5% 5.5% 5.0% 5.0%
Deposit, average, % 5.2% 9.0% 6.0% 5.5% 5.0% 4.0% 4.0% 4.0% 3.5% 3.5% 3.0% 3.0%
Social Indicators
Real disposable income, % YoY -1.0% -6.5% -5.9% 1.0% 2.0% 3.0% 3.0% 3.5% 4.0% 3.5% 3.0% 2.5%
Real wage growth, % YoY 1.3% -9.5% 0.0% 1.0% 2.0% 3.0% 2.0% 2.5% 2.0% 2.5% 2.0% 2.5%
Nominal monthly wages (RUB p/m) 32,600р. 36,000р. 37,000р. 38,110р. 40,016р. 42,416р. 44,071р. 45,745р. 47,301р. 48,956р. 50,621р. 52,241р.
Unemployment, % EOP 5.3% 5.6% 5.3% 5.5% 5.4% 5.3% 5.0% 4.8% 4.8% 4.7% 4.6% 4.4%
GDP per capita, US$'000* $12,890 $9,196 $9,088 $10,420 $10,870 $11,374 $12,337 $13,672 $14,684 $15,684 $16,923 $18,439
Trade & flow indicators
Trade balance, US$ bln $186 $135 $90 $105 $110 $120 $160 $165 $155 $150 $160 $160
Current account, US$ bln $57 $66 $22 $28 $30 $33 $75.0 $75.0 $65.0 $65.0 $70.0 $65.0
Current account % of GDP 3.0% 5.3% 1.7% 1.9% 1.9% 2.0% 4.3% 3.8% 3.1% 2.9% 2.9% 2.5%
FDI, US$ bln $23.0 $5.0 $25.0 $20.0 $25.0 $35.0 $50.0 $60.0 $66.0 $70.0 $75.0 $80.0
FDI, % of GDP 1.2% 0.4% 1.9% 1.3% 1.6% 2.2% 2.8% 3.1% 3.2% 3.2% 3.1% 3.1%
Capital inflow/outflow, US$ bln -$154.1 -$90.0 -$15.0 -$10.0 -$15.0 -$15.0 -$25.0 $0.0 -$10.0 $0.0 -$20.0 $0.0
Debt & Reserves
Foreign public debt, US$ bln $52.0 $42.0 $45.0 $46.0 $50.0 $52.0 $65 $75 $80 $85 $90 $95
Foreign public debt, % of GDP 2.8% 3.2% 3.5% 3.1% 3.2% 3.2% 3.7% 3.8% 3.8% 3.8% 3.8% 3.6%
Foreign private debt, US$ bln $545.0 $470.0 $450.0 $440.0 $460.0 $480.0 $550 $650 $750 $850 $950 $1,100
Total foreign debt, % of GDP 32% 39% 38% 33% 33% 33% 35% 37% 40% 42% 43% 46%
Forex reserves (ex gold), US$ bln $340 $320 $320 $350 $370 $400 $500 $580 $660 $720 $800 $850
Currencies
RUB/US$, year-end 61.4 73.5 61.3 62.0 64.0 66.0 62.0 60.0 62.0 63.0 62.0 60.0
RUB/US$, average 38.6 62.0 67.0 59.0 63.0 64.0 63.0 61.0 61.0 62.0 62.0 61.0
RUB/EUR, year-end 72.0 79.7 64.5 65.0 68.0 70.0 60.0 57.0 62.0 66.0 68.0 66.0
RUB/EUR, average 51.5 67.0 74.0 62.0 65.0 68.0 61.0 58.0 61.0 64.0 68.0 67.0
Average Urals, US$ p/bbl $100 $54 $45 $54 $65 $75 $75 $80 $70 $70 $70 $70
Source: Federal Statistics Service, Central Bank of Russia, Macro-Advisory estimates
Note: Excludes the Crimea population and GDP contribution

31
Who are we?
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clients to optimize their business strategies and to make their forecasts more reliable. Macro-Advisory cuts
through the noise to help businesses focus on the underlying trends, the real political risks, and the
opportunities across the region.
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32
Recent research publications*
Russia Macro Monthly: Political optimism ignores growth limitations (April 2017)
On the cusp … but, of what? (March 2017)
Last Throes Of Winter (February 2017)
Russia’s Trump card? (December 2016)
Green shoots of a winter harvest? (November 2016)
Preview 2017-19: Economy: Preparing For the Next Phase (January 2017)
Oil Price Outlook: Elephants Don’t Dance (January 2017)
Politics: Battle Line Are Drawn (January 2017)
In Context: Foreign investors in Russia (October 2016)
Are hopes for higher oil wishful think or the new reality? (October 2016)
Sanctions: Perception is as damaging as reality (July 2016)
What does Brexit mean for Russia? (June 2016)
Market Outlook: Partying like its 1999 or 2009 … but with less to celebrate (April 2015)
Eurasian Union: The hype versus the hope (June 2016)
Initiation report (May 2015)
Country Profile: Ukraine: An economic & political obstacle course (March 2017)
Uzbekistan: The opening of a new frontier economy (November 2016)
Iran: In need of fresh catalysts (August 2016)
Mongolia: MPP promises Khan do attitude (August 2016)
Iran initiation report (November 2015)
Kazakhstan: A difficult balancing act (October 2015)
Georgia: What to do when reality intrudes? (June 2015)
Armenia: Country profile & macro update (May 2015)
Turkmenistan: At a crossroads or, in a cul-de-sac? (April 2015)
Azerbaijan: Country profile & macro update (February 2015)
Caspian Corridor: Inaugural Caspian Corridor report (October 2015)
Sector Overview: Ukraine Agriculture: Considerable opportunity out of chaos (October 2016)
Russia Insurance (July 2016)
E-commerce in Russia (Published in April 2016)
Russian Agriculture: Update (January 2016)
Russian Infrastructure: Boosting the Present by Building the Future (November 2015)
Kazakh Agriculture: Lagging but with huge potential (November 2015)
Pharmaceuticals: The long road to localization (July 2015)
Special Focus: Improving demographics is positive for long-term growth (October 2016)
Deteriorating labor demographics (January 2015)
Upcoming publications
Country Profile: Kazakhstan update (April 2017)
* Clients may request copies of any published reports via: info@macro-advisory.com

33
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