Table of Contents

I. INTRODUCTION

II. MACROECONOMIC DEVELOPMENTS

III. PRODUCTION

IV. CONSUMPTION

V. IMPORTS

VI. EXPORTS

VII. TARIFFS

VIII. CONCLUDING REMARKS

I. INTRODUCTION

1. At its last session, the Group drew attention to the need for continuing efforts to identify potential markets for tea. In reviewing market developments and prospects for the Russian Federation, the Group concluded that analysis was also needed for the other areas of the former USSR, which is now made up of the Commonwealth of Independent States (CIS) and the Baltic States. This would provide the Group with a broader picture of the demand situation before and after the political and economic reforms which were introduced in 1991 and 1992 and would assist the Group in assessing future prospects for dynamic and potentially high growth import markets.

2. This document presents recent information available to the Secretariat on market developments and prospects in the CIS and Baltic States where demand for tea has grown sharply in the last five years. This document discusses market trends after the reform, from 1992 to 1998, and some possible implications for the future. Members of the Group may wish to provide additional information available as a result of their individual marketing efforts and thus contribute to the Group's discussion of measures to increase demand for traditional and value-added teas.

II. MACROECONOMIC DEVELOPMENTS

3. In 1991, political reforms in the former USSR resulted in the break-up of the Union and the formation of the CIS which is a grouping of individual independent states. The Baltic countries of Estonia, Latvia and Lithuania did not join the CIS. By 1992, the countries began the economic reform process moving from a centrally-planned and state-dominated system to market-oriented economies of individual states.

4. The economies of the newly independent states went through extremely difficult transitional periods, as can be seen, for example, from the economic indicators relating to GDP growth and inflation in the Russian Federation (Table 1).

Table 1. Economic Indicators - The Russian Federation

Source: International Monetary Fund and World Bank
1/ GDP growth rates (%)
2/ Average annual inflation rates (%)

5. The reform process included trade liberalization, lifting of price controls, abolition of centrally planned distribution systems and the discontinuation of government subsidies on farm inputs. The impact of these changes on the tea industry was substantial.

6. Tea production declined by 51 percent from 116 000 tonnes in 1991 to 57 100 tonnes in 1992 due mainly to the reduction in the use of fertilizer and other agriculture inputs, as subsidies and price controls were removed. Consumption dropped by 45 percent from 278 000 tonnes in 1991 to 153 300 tonnes in 1992 as a result of a shortage in the market place and an increase in prices due to market deregulation. Smaller shipments from Georgia, the largest tea producing country in the CIS, and limited foreign exchange to finance imports, reduced the availability of tea in the market place. The increases in tea prices outpaced the increases in the prices of many other basic food items because the deregulation of the tea market took place earlier than most of the other basic food items.

7. Tea imports by the CIS and Baltic States declined by 54 percent from 166 000 tonnes in 1991 to 76 000 tonnes in 1992. Apart from the decline due to limited foreign exchange availability, the lack of market institutions, particularly distribution channels exacerbated the situation, because the centrally-planned marketing system was discontinued before the new marketing system was fully developed. With the overall economic recovery after the initial transition period, tea imports picked up very quickly and actually surpassed pre-reform levels by 1995, but inter-state trade continued to decline because demand for imported teas after trade liberalization continued to expand at the expense of domestically produced tea. The introduction of new trade policies in each independent state also contributed to the decline in intra-regional trade as most of these countries looked towards countries outside the region for economic cooperation.

III. PRODUCTION

8. Tea is not produced in the Baltic States and therefore, discussion is confined to the CIS. Tea production in the CIS continued its fall, from 57 100 tonnes in 1992 to 35 000 tonnes by 1998, despite a recovery to 84 900 tonnes in 1993 (Table 2). This represented a decline of 7.8 percent annually between 1992 and 1998 compared to a 2.5 percent reduction annually, a decade earlier (1982-1988). The main reason for the decline was the reduction in the use of agricultural inputs caused by a multitude of factors, the most direct being the removal of government subsidies and price controls. In addition, preference for imported tea eroded demand for domestically produced teas. During the 1992-98 period, output in Georgia, the main tea producing country (86 percent of the tea production by the CIS) declined from 50 000 tonnes to 30 000 tonnes and in Azerbaijan, the third largest producing country, output declined by 26 percent per annum, from 5 500 tonnes to 960 tonnes. Production in the Russian Federation, the second largest tea producing country, on the other hand, grew by 17 percent annually from 1 600 tonnes in 1992 to 4 100 tonnes in 1998.

Table 2: Tea Production (Thousand tonnes)

IV. CONSUMPTION

9. Tea consumption¹ in the CIS and the Baltic States increased from 153 300 tonnes in 1992 to 210 900 in 1998, peaking at 240 200 tonnes in 1995, the highest level during the 1992-98 period (Table 3). Apart from 1994 and 1996 consumption remained above 200 000 tonnes since 1993 mainly due to the expansion/recovery in the demand for tea in the Russian Federation. The growth rate during this period was 5.5 percent per annum compared to 4.1 percent annually in the previous decade (1982-88).

Table 3: Tea Consumption (Thousand tonnes)

10. Consumption in the Russian Federation grew by 9.1 percent annually from 76 600 thousand tonnes in 1992 to 129 100 tonnes in 1998. Consumption was highest in 1997 when levels reached 152 300 tonnes. However, the economic crisis which affected the country in the last quarter of 1998 resulted in lower consumption levels, which could fall further in 1999. During the same period (1992-98), consumption in Uzbekistan, the third largest consuming country, rose from 6 000 tonnes to 15 000 tonnes. Consumption in Ukraine, the fourth largest, grew from 10 000 tonnes in 1992 to 12 600 tonnes in 1998. Consumption in Kazakhstan, the fifth largest, expanded by 12.9 percent annually, from 4 400 tonnes in 1992 to 9 100 tonnes in 1998. Consumption in the three Baltic States also grew rapidly over the same period, though from small base quantities. On the contrary, consumption in Georgia, the second largest tea consuming country in the CIS, declined by 14 percent annually, from 50 000 tonnes in 1992 to 21 000 tonnes in 1998, mostly associated with the decline in domestic production.

11. Per caput consumption of tea in the CIS increased from 0.5 kg in 1992 to 0.7 kg in 1998, an annual average growth rate of 5.2 percent, mostly due to the rise in consumption in the Russian Federation (Table 4). The annual growth rate in the Baltic States was far higher at 35.7 percent mostly due to their very low base rate. Per caput consumption of tea was 0.05 kg in 1992 rising to 0.3 in 1998. All three Baltic States exhibited significant increases in per caput consumption with Estonia registering the highest overall level at 0.48 kg.

Table 4: Per Caput Tea Consumption (Kg)

V. IMPORTS

12. Since reforms were introduced in 1992, centralized state imports were discontinued and private sector traders were given the opportunity to take over the tea trade. Market opportunities as a result of trade liberalization have attracted private sector involvement which has turned the industry into a very dynamic one. Tea imports by the CIS and the Baltic States increased from 96 200 tonnes in 1992 to 222 200 tonnes in 1997 (Table 5). The annual growth rate during this period averaged 18.2 percent per annum. However, the economic crisis, particularly in the Russian Federation which deepened in the last quarter of 1998 resulted in a contraction in imports to 196 100 tonnes for 1998, lowering the annual growth rate to an average 12.6 percent. This rate was very similar to that prevailing a decade earlier (1982-1988) when the annual growth rate averaged 10.5 percent.

Table 5: Imports (Thousand tonnes) 1/

13. Imports by countries in the CIS in Europe increased by 21.2 percent per year, from 85 400 tonnes in 1992 to 148 900 tonnes in 1998. Imports peaked in 1997 when shipments reached 172 100 tonnes. Over the same period, imports by the Russian Federation, the world's largest tea importing country (accounting for 17 percent of the world tea imports in 1998) were up from 75 200 tonnes in 1992 to 135 000 tonnes in 1998, after peaking at 158 000 in 1997, an average annual growth of 10.2 percent. Tea imports by countries in the CIS in Asia increased annually by 27.3 percent from 10 400 tonnes in 1992 to 44 200 tonnes in 1998. Imports by Uzbekistan, the second largest importing country in the CIS, grew from 6 000 tonnes to 15 000 tonnes during the same period (1992-98). Imports by Ukraine, the third largest, increased by 4.2 percent annually, from 10 000 tonnes in 1992 to 12 800 tonnes in 1998 and Kazakhstan, the fourth largest, increased tea imports from 4 400 tonnes in 1992 to 9 200 tonnes in 1998, an annual growth rate of 13.1 percent. Though figures were still small, imports into the Baltic States registered a sharp increase from 400 tonnes in 1992 to 3 000 tonnes in 1998.

14. Trade liberalization has also changed trading partners and their shares of the tea trade. Prior to the reforms, the bulk of tea imported by the former USSR was from India and China (Chart 1). Their shares of the total tea imports in 1991 were 64.2 percent and 21.3 percent, respectively. The third largest supplier (7.5 percent of the total) was Indonesia followed by Sri Lanka (3.1 percent). Georgia also shipped most of its output to other areas of the former USSR. After the reforms, India continued to be the largest tea supplier to the CIS and the Baltic States, but its share declined, while that of Sri Lanka increased significantly. In 1998, India and Sri Lanka accounted for 60.1 percent and 23.4 percent, respectively of tea imports by the CIS and the Baltic States, while China and Indonesia accounted for 5.2 percent to 3.0 percent of the market, respectively, and Georgia, accounted for 2.8 percent. It is noteworthy that imports from European countries have also steadily grown. In 1998, more than 2 000 tonnes, or 2.1 percent of the total, were imported from these countries.

Chart 1: Imports by Origin

VI. EXPORTS

15. Exports of tea from the CIS and the Baltic States are mostly re-exports except for small quantities of domestically produced teas from Georgia and the Russian Federation, the two major tea exporting countries (Table 6). In 1998, Georgia, exported about 9 000 tonnes of tea (mostly bulk tea) and the Russian Federation, 10 000 tonnes, most of which was retail- packed (or packaged) tea.

Table 6: Tea Exports (Thousand tonnes)

VII. TARIFFS

16. Since the economic reforms of 1992, each country of the CIS and the Baltic States has introduced different tariff rates. Import duties for tea imposed by each country are summarized in Table 7.

Table 7: Import Duties on Tea in the CIS and Baltic States (as of 1998)

17. Some countries, such as the Russian Federation, impose higher import tariffs on value added tea (retail-packed) than on bulk tea. This country doubled its import duty on packaged tea in June 1997. Though the increase in import duty was aimed at protecting the domestic tea processing and packing industry, it had negative consequences on prices and demand. Between December 1996 and January 1998, retail prices for packaged tea increased by 28 percent from 31.3 roubles/kg to 40.0 roubles/kg in central Russia, and by 31 percent from 24.2 roubles/kg to 31.7 roubles/kg in the north-west Russia. Corresponding rates for some other areas were as high as nearly 60 percent. The increases in market prices led to a shift to the consumption of lower quality teas, and a reduction in the imports of high quality tea. During the first five months of 1997, prior to the increase, the Russian Federation imported 51 800 tonnes of packed tea (average 10 400 tonnes a month) while in the seven months after the increase, imports declined to 42 000 tonnes (average 6 000 tonnes a month). Furthermore, the increase in tariff did not increase government revenue because of the subsequent decline in import volumes.

VIII. CONCLUDING REMARKS

18. The economic reforms of the former USSR which were launched in 1992 have had a profound impact on the tea market in the CIS and the Baltic States. Production, consumption, imports and exports in these states dropped temporarily during the first few years of the reform, as market prices increased sharply. After a transitional period, consumption, imports and exports (mainly as re-exports) recovered to pre-reform levels, mostly in 1995 and have since grown more rapidly than during the pre-reform period. Following the initial price hikes, price increases have become infrequent as the private sector marketing system proved to be very efficient.

19. Trade liberalization has brought new trends to the market. Imports from outside the CIS and the Baltic States have increased. Imported high quality tea became available to consumers and demand for these teas increased.

20. Another notable trend has been the increasing demand for imported packaged tea which has grown so rapidly that it now accounts for more than 85 percent of the total tea imported by the Russian Federation. In 1991, a year before the economic reforms, 95 percent of the tea consumed in the Russian Federation was packaged domestically.

21. Recently, a tea company in the Russian Federation began construction of a large tea packaging plant. The company has a market share of about 20 percent in the Russian Federation and currently imports tea packed in its plants in other producing countries. Its new plant will have a capacity of 50 000 tonnes a year using imported machinery from Italy and Germany. The plant is expected to benefit from the increasing demand for packaged tea not only in Russia but also in other CIS countries and the Baltic States.

22. Demand for high-quality packaged tea in the CIS and the Baltic States is likely to continue to expand, as long as certain conditions are fulfilled. Demand for packaged tea exceeds the capacity of tea packaging by domestic plants, and this is likely to continue for some time. The countries of the CIS and the Baltic States have been important markets for internationally traded tea, especially since the mid-nineties. Indications are that they will continue to be very important in as far as demand for high quality teas is concerned, and will also represent the markets with the greatest potential for growth, providing they regain positive economic growth relatively quickly. Another possible constraint to continued strong growth would be the relatively high consumption taxes and import duties imposed in 1997. If current representation by the industry is successful in lowering import duties then the growth trend witnessed up to mid-1997, when the increases in duties were imposed, should be regained.

1  Consumption in this document is defined as the sum of production and net trade (imports minus exports). Stock changes were not taken into consideration, as stock figures were difficult to obtain.