There’s Ample Tea for Sanctioned Russians
Six months after the US and EU imposed sanctions, the tea aisles in Russian grocery stores display few European brands, but the shelves are not bare.
By Dan Bolton
A Moscow-based senior executive at one of Russia’s top domestic tea brands told Tea Biz, “The Russian economic situation is generally stable, particularly the tea segment.” He writes, “Consumers are now getting enough tea at lower prices than May-July."
In the UK, food inflation in July accelerated to 9.3%, according to The Sun. In August, the price of food increased 10.5%, the most significant jump since 2008. US food inflation hit 10.9% in July, the highest since May 1979.
In contrast, the ruble trades at pre-war exchange rates in Russia, and food prices are down 11.3% since the first year, thanks to government subsidies.
According to the UN Comtrade database, Russia purchased $436.2 million in tea in 2021, trailing Pakistan at $596.5 million and the US at $531.8 million. Tea is a mature sector, considered a household staple, as more than 90% of Russians drink mainly black teas at home.
Russia produces some tea in Sochi and the Krasnodar Territory, two growing regions along the Black Sea. The 400 hectares of tea land in Krasnodar (down from 1800 hectares) yields about 400 metric tons. Domestic tea production will likely increase along with imports from adjoining Azerbaijan and Georgia. In 1988 Georgia cultivated 67,000 hectares of tea, with 13,000 hectares under tea in Azerbaijan.
According to the Moscow tea executive, “Russia’s tea market is consolidated (four players hold 80% of the market). This is because the big food companies solved their sourcing problems quite efficiently. We noticed, for example, that Orimi has increased its market presence, taking share from smaller competitors.”
“Seventy-five percent of Russian consumption is tea bags. We can switch from one origin to another quite easily,” he explains. "We manage blends and sign forward contracts to keep the lowest cost. We have almost stopped purchasing from Sri Lanka, switching to Assam and Kenya. Prices for OPA grades haven’t risen so high as TGFOPs and FBOPs,” he said. However, shortages of European brands of orthodox processed leaf and broken-leaf grades have increased prices.
“For loose leaf orthodox teas, of course, it’s a tough time,” he adds. “We try to manage it by decreasing promotional sales to lower demand in supermarkets.” He said consumers only buy premium teas on promos [promotional prices] due to the slowing economy and won’t pay full price.
Before the February invasion of Ukraine, Russia imported large quantities of packaged tea from Europe's best-known brands. European blenders source most of their black tea from India, Sri Lanka, and Kenya. Shipments of packaged tea were halted, and consignments of bulk tea were re-routed for delivery to ports in Georgia and Novorossiysk on the Black Sea. Re-exports via Turkey and Iran increased.
Russian tea blenders have unlimited access to Chinese tea, but the demand for green tea is limited, comprising only 2.2% of the market. Shipments from India and UAE ($22 million in 2020) currently exceed pre-war levels. On the other hand, the sales value and volume of tea imports from Kenya ($43 million in 2020) and Sri Lanka ($140 million) have declined.
Sri Lanka produces about half of the world's black orthodox tea, but social upheaval and erratic weather reduced yields to the point that production fell 19% during the year's first half. Russian and CIS demand shifted to India, which reported a 10.4 million-kilo jump in exports. Orthodox processed teas accounted for 8.9 million kilos of the increase. According to the Tea Board of India, exports of orthodox teas increased to 48.6 million kilos between January and June 30.
Sri Lanka’s orthodox tea still finds Russian buyers, but tea exports overall fell by 15 million kilos to 148 million kilos for the first six months compared to 2021. Exports to Iraq through July were up by 35%, and the United Arab Emirates (UAE) imported 13 million kilos, up 5%. The Russian Federation, formerly Sri Lanka's top tea trading partner, imported 12 million kilos, a decrease of 22% compared to 2021.
India banks, with government approval, bypassed EU and US sanctions. As a result, imports from Russia have soared by 369% (mainly due to purchases of discounted oil). While tea exports to Russia and Ukraine were halted in March, tea shipments to Russia experienced a significant jump in June as India announced payments denominated in rupees could be settled with rubles.
Russia and the CIS neighbors are now the largest buyers of Indian tea, purchasing 20.6 million kilos of the 97 million kilos India exported during the first six months of the year. Purchases were mainly Assam CTC. Availability and logistics proved formidable obstacles. Due to erratic weather, tea production in India dropped from 180 million to 152 million kilos during the year's first half.
Orders from Ukraine remain flat, but the 15 million kilos Russia purchased during the year's first half suggests that Russia will exceed last year’s total.
Kenya is the other tea supplier losing market share in Russia. Auction prices are depressed, averaging around $2 per kilo, but tea orders from the CIS are down mainly due to war-related transport costs. In Mombasa, it costs $10,500 to book a 40-foot container of tea bound for the Black Sea. Shipments that took 65 days have stretched to 90 days to reach Russian and CIS buyers. Sales of Kenyan bulk tea to Russia declined 15% from January through May compared to 2021. Uzbekistan and Kyrgyzstan imported 40 to 72% less tea during this period.
BIZ INSIGHT - Chinese exports to Russia dropped by 50% immediately after the invasion of Ukraine but have since rebounded. According to Bloomberg, Russia bought $6.7 billion worth of Chinese goods in July. Russian media reports that trade between Russia and China will reach an estimated $165-170 billion this year, breaking a $140 billion record set in 2021. China is aggressively expanding tea exports, valued at $2.1 billion last year, a 28.6% increase compared to 2020. Much of that sales growth was to Belt and Road countries in central Asia and Africa. Last year China, the world's largest tea-producing country, spent only $185 million to import 46,700 metric tons of mainly black teas. But given the 8% per year growth of black tea that China now produces, in 2023, China may displace Kenya as Russia’s third largest tea trading partner.