Market Information
Europe

Russia Market Report - Seafood

2006

Jane Barnett
Senior Market Development Officer
Agriculture and Agri-Food Canada
Seafood Section
1084 Freely Court
Mississauga, Ontario
Canada
L5J 4S5
E-mail: barnettj@agr.gc.ca

Seafood Consumption

Consumption of fish and seafood in Russia has grown rapidly over the last couple of years, rising from 14.2kg per capita in 2003 to 15kg in 2004, and the growth pattern is expected to have continued in 2005. The increase in consumption of fish and fish products is attributed to the following factors: rising consumer disposable income, especially in Moscow and St. Petersburg; changes in consumer preferences due to increased perceptions of healthy, nutritious and low-fat foods; higher prices of other competitive proteins; increased investment in new processing facilities, leading to a larger availability of products; and improvements in marketing channels.

Retail Markets for Seafood

The variety of fish and seafood products in the Moscow and St. Petersburg retail markets today is equivalent to other markets in the European Union. There is a full range of items found in local markets, from low or no value-added products (whole frozen or headed and gutted fish) to highly value-added selections (breaded fish, fish sticks, surimi).

According to market analysts in the USDA Foreign Agricultural Service, there is an annual increase of 17 per cent in the consumption of fish and fish products in general. However, the dynamics of growth are most apparent in ready-to-eat market segments such as shrimp, crab, scallops, squids and mussels, where growth is taking place at more than 30 per cent annually, and consumption is estimated at over three million kilograms per year. Customers with high purchasing power consume delicatessen seafood at least once or twice per week, while other consumer categories purchase expensive seafood only for holidays and festive occasions.

Almost 4,000mt of fish and seafood is sold annually through delicatessen and other ready-to-eat market outlets, but this channel is far from saturated. Increases in quota allocations for seafood in Russia reflect development in the domestic seafood market, but Russia still exports production in bulk, primarily to China and Japan. Recently, the Russian government has taken steps aimed at stimulating processing of harvested catch by simplifying procedures of catch declaration at Russian ports, but there are not enough processing facilities in coastal areas. The new legislation referred to above that would mandate all catches to be landed could stimulate investment in new processing facilities, particularly in ports in the far east.

Currently, there are a limited number of brands in the seafood ready-to-eat market, and they are mostly Russian. The largest share of the market belongs to the Ledovo company which has a 30 percent market share of fish in general, and an 80 per cent market share of other specialty seafood items. Some foreign brands are represented, the majority from Denmark.

According to the USDA FAS report, Russian consumers are increasingly demanding greater variety and quality. As a result, local retail outlets and restaurants now offer a wide selection of both traditional products (herring, mackerel, salmon) and more exotic items such as squid, prawns, mussels and oysters. Although Canada accounts for less than 4 per cent of Russia's imports of fish and seafood products, rising consumer income and changing consumer habits offer new market opportunities for Canadian fish and seafood products.

Metro Cash & Carry, part of the Germany-based Metro Group, is the world's third-largest retail chain with annual sales of over C$79 billion and the number one retailer in Russia. MCC carries 20,000 food items and 30,000 non-food items, and generates 50 per cent of Metro Group sales worldwide. They have 544 stores in 28 countries. MCC opened its 23rd store in Russia in June 2006, 450km from Moscow, illustrating the growing geographic reach of this chain. MCC will open at least another seven stores in Russia this year. The company plans to serve all regions of the country, including Siberia. MCC currently sells live lobster from Canada and is seeking other fresh and frozen products. The company negotiates general supply agreements directly with foreign suppliers, but leaves the logistics of importing and distribution to other companies.

Auchan, Carrefour, and Wal-Mart are other major foreign retailers operating in Russia.

According to a recent seafood conference held in Moscow in conjunction with the Seafood Russia trade show, Russian-owned retail chains are growing quickly, particularly those being developed to serve mid-size cities (500,000 to 1 million people). The largest Russian-owned retail chain, Pyaterochka, now has 1,600 stores to serve consumers who are now demanding retail outlets closer to their homes. In 2004, supermarket growth was 18 per cent.

It has been recently been reported that a merger has taken place between Pyaterochka and another Russian-owned retail chain, Perekrestok to create Russia's largest retail operation with expected sales of US$6 billion in 2008. Other mergers are expected.

Foodservice Markets for Seafood

Seafood is on the menu of virtually every restaurant in Moscow, with sushi the fastest-growing segment of the foodservice trade. Comparatively speaking, however, seafood is at the upper end of menu prices. The bill for a simple sushi dinner for two (no alcohol, no dessert) can exceed C$70. Japan Foods has been selling seafood to high-end and high-quality restaurants in Russia for 11 years and is now expanding operations into Siberia since the market for Japanese food in Moscow is saturated.

As noted at the Seafood Russia conference, expansion beyond major Russian cities has significant problems for both distribution and sales. Sanitary and temperature protocols are not well understood in the regions and it could be that problems prevail over the significant advantages presented by gaining broader distribution for seafood products. Japan Foods works to educate retailers and chefs about these matters, but it is difficult to get education to staff members below the manager level.

A chain of seafood restaurants featuring an "average price" menu is to be launched in Moscow, becoming the first large project of its kind in the Russian capital. The concept, which will be called Goodman-Fishhouse, is similar to one the owner has already launched in the meat sector. The average receipt is expected to be around US$35-40, and the restaurants are designed to seat 250 people. Experts are challenging the viability of this initiative, however, saying that restaurants cannot serve inexpensive seafood as fresh fish must be delivered exclusively by air. Russian consumers are used to thinking that seafood is going to be expensive, but to succeed, Goodman-Fishhouse will have to change that assumption.

Seafood Trade

In 2005, Russia imported over US$1 billion in seafood products, primarily herring, mackerel, hake, salmon, and shrimp. This number is up 49 per cent from the US$759.4 million imported in 2004. Volumes are also up (18%), but the greater increase in value suggests that some higher-

Source: World Trade Atlas & Statistics Canada

value products (such as farmed salmon) are being imported and also that traditional products are being sold at higher prices. For 2004 and 2005, Norway was the largest supplier of seafood to Russia; however, a ban on chilled fish imports (aimed at stopping imports of farmed salmon and trout) may have an effect on Norway's position for 2006. China is the second-largest supplier of seafood to Russia, based primarily on low-cost exports of twice-frozen Alaska pollock. Denmark, the US and Canada follow. Both Canada and the US boosted exports of fish products to Russia by nearly 100 per cent in 2005.

According to Global Trade Atlas, Russia's exports in 2005 totalled only $517 million, making the country a net importer of seafood despite its significant production base. In fact, Russia's trade deficit approached $555 million in 2005, an increase of almost 56 per cent over 2004. [Note: There is some discrepancy in export statistics as internal Russian figures put exports at more than $1.5 billion in 2005.]

Of destinations for exports, China was at the head of the list at US$127.5 million, up more than 81% from the year previous. It is likely that Russia's decaying processing infrastructure has meant that product harvested in Russia is going to China for re-processing and re-export, probably to Japan which is the number two destination for Russian exports. Like Canada, Russia is concerned about the amount of seafood moving offshore for processing.

Russian seafood exporters appear to be somewhat concerned about Russia's accession to the World Trade Organization (WTO), a topic that came up frequently at the Moscow conference. While noting that the tariff regime is unlikely to change, exporters and government officials were emphasizing that integration into the world economy would pose real challenges for the industry in terms of improving competitiveness and cracking down on illegal trade in seafood. It was also noted that Russia lacks the industry structures common in other countries - fishermen's and processors' associations, export councils, industry-government bodies - that could help the industry move more easily into the new global environment. Industry would like to develop structures similar to those in place in Norway and Iceland.

Canada's Seafood Exports to Russia

The Russian market is in a period of intense expansion in terms of seafood demand. After eight straight years of economic growth, and with consumer incomes rising, the demand for greater variety and better quality of seafood products is booming.

Canadian seafood exports to Russia have grown significantly in recent years, from 4.1 million in 2002 to more than $40 million in 2005. Exports almost doubled between 2004 (when $21.1 million was exported) to $40.3 million in 2005. Growth is in an interesting combination of lower and higher-valued products, although it should also be noted that Canadian lobster exports dropped slightly in 2005 from $788,000 in 2004 to $702,000. That said, however, overall export growth was fuelled by huge increases in the shellfish sector, from $5 million in export sales in 2004 to almost $14 million in 2005, an increase of 180 per cent. This demonstrates the potential for major growth as Russian demand for protein rises, incomes increase and tastes become more sophisticated as a result of a more open and westernized economy.

Source: Statistics Canada

Trade Challenges

Trade challenges include the tariff of 20 per cent that applies to virtually all seafood products. While it is possible that these high tariff levels may be reduced through negotiations for WTO accession, speakers at the Moscow seafood conference seemed convinced that fish tariffs would not be affected by Russian accession. Another challenge are age limits after the date of production imposed on imported fish. These age limits are shorter than reasonable for properly processed and handled seafood products and reflect the period when most trade was done between Soviet states where processing and distribution systems were less than adequate. The Canadian Food Inspection Agency is working on eliminating these requirements. The greatest challenge to Canadian exporters wanting to develop markets in Russia is the risk of non-payment, a risk typically addressed through requirements for full payment well in advance of delivery.

Market Challenges

Beyond the major cities (really, just Moscow and St. Petersburg), there are significant market challenges. Distribution, refrigeration, and logistical problems are all issues to be resolved, but they cannot be fixed without having an appropriate infrastructure into which goods may be sold, and the retail environment in Russia is in bad shape. The commercial revolution that brought Metro, Auchan, Carrefour, WalMart and IKEA to Moscow has not penetrated the vast regions of Russia where consumers still line up three or four times in stores just to buy one item.

The Moscow seafood conference was illuminating on this point. One speaker spent his time explaining to an audience of seafood buyers and retailers that Russia was progressing slowly but along the same phased development as had occurred in other developed markets. He noted that Russia was just now moving from phase 2 to phase 3, where consumers had some amount of disposable income that they could spend dining out, or on leisure activities or on purchasing delicatessen or ready-to-eat items in supermarkets. His message to retailers was that consumers could now choose, and that they would leave stores that were unclean and where service staff were rude. His lesson was that in a market economy, those in the business of sales must learn how to make a customer out of a passer-by and a habitual purchaser out of a consumer. This is a whole new world for Russian retailers who have never until recently had to deal with a consumer who did not need them more than they needed her.

Supply Background

Russia has had extensive fishing operations in a number of areas: in the north, in the Barents Sea and Arctic Ocean, and in the east, in the Bering Sea and the Sea of Okhotsk. Russia has also operated a significant fleet of distant-water vessels. In the past, virtually all production was used to supply the domestic market and for "export" to the Soviet states.

The 9.2 million metric tonnes harvested by the USSR in 1991 was its lowest total in more than a decade. Since then things have gotten worse, with only a slight uptick taking place in 2005. Russia has been slow to develop legitimate export markets, in part because of the continuing problems with illegally harvested or over-quota "black" fish.

Source: Seafood International

In the 1990s after the break-up of the Soviet Union, Russia's fishing industry was in complete chaos. Mechanisms for keeping track of catches broke down so there was no clear understanding of whether catches were exceeding quotas and no way of enforcing conservation. Fish became a way of earning hard currency, most of which into the pockets of vessel captains who would land catch directly into markets in Britain, Scotland or Japan. During this period, many world whitefish markets were supplied with "black" cod from the Barents Sea, a resource fished jointly with Norway. In the east, Japan's markets for crab and sea urchins were supplied by illegally harvested and unreported catches from the disputed area around the Kuril Islands. These Illegal, Unregulated and Unreported (IUU) fisheries continue to exist, bedeviling markets for Canadian snow crab and sea urchins in Japan and whitefish markets around the world.

These issues were discussed at the Seafood Russia conference, particularly with reference to issues in the Russian Far East. Fishing operations in Primorsky Krai province (capital Vladivostok) estimated losses in 2005 of 370 million rubles (C$15.6 million) as a result of IUU fisheries. In the Kamchatka region, legal catches of crab have declined from 40,000mt to 20,000mt as poaching has increased. Caviar prices have also declined as a result of illegal activities. Over-quota fishing continues to occur in the Barents Sea as well. According to information presented at the conference, the legal quota of cod in the Barents is 480,000mt, but Russian trawlers may be overfishing that quota by as much as 100,000mt a year. In the North and the East, vessels can escape quota restrictions by offloading their excess catch in international waters onto different ships usually flying under flags of convenience.

There are three small areas of international waters adjacent to Russia: the Svalbard zone in north (sometimes called the "loophole" where many of the illegal transfers of cod occur), what's called the "donut hole" in the Bering Sea, and the area known as the "peanut hole" in the Sea of Okhotsk. Fishing in the donut hole in the 1970s and '80s, for example, was so aggressive that stocks of Alaska pollock were virtually decimated although they are now back to strength as a result of a strictly-policed moratorium. The peanut hole has suffered from overfishing not only by Russia but by China, Taiwan and Korea. With little enforcement, this area has been substantially overfished, with deleterious effects on stocks of Alaska pollock and similar repercussions in the whitefish marketplace.

In a very recent (mid-July 2006) move, the Russian government has published details of a law that would allow for the private sale and transfer of quota shares as a way of encouraging the survival of larger and more efficient fishing operations while providing smaller operators the incentive to sell. Another development moving through the regulatory process in Russia is a requirement that would force all direct seafood exports from the far East to be processed through a Russian port or border station. The move is seen as an effort to crack down on illegal transshipments of fish now taking place at sea. When approved and implemented, these regulations would make it mandatory that shipments of all catches from Exclusive Economic Zone (EEZ) grounds be cleared in ports prior to export. This law would also help develop onshore processing and infrastructure, as well as discontinue the practice of undermining prices by IUU fishermen to the benefit of legal producers. If Russia is capable of enforcing this legislation, it will make a difference to Canadian snow crab and sea urchin exporters who have seen their prices tank as a result of the IUU fishery.

The Russian distant-water fleet is old and expensive to operate. Nonetheless, it is still in operation. The Department of Fisheries and Oceans has, for the past few years, allowed fishers to give contracts to several Russian vessels to process the catch of the joint-venture component of the Pacific hake fishery. The hake processed by this fleet goes into direct competition with Canadian hake processed in more expensive Canadian shore-based plants, which market their finished products around the world. This "joint-venture fish" becomes "product of Russia" as soon as it is on board, thereby entering Russia "duty free." This 20 per cent savings on duty gives this fish a significant advantage over the product produced by shore-based Canadian plants.

Finally, as labour shortages begin to affect the seafood industries in developed countries, Russian workers are stepping in to fill the gap. Throughout Atlantic Canada, companies have brought in Russian workers to fill vacancies on processing lines - a result of the out-migration of plant workers to the oilfields of Alberta.

Report on Seafood Russia

Following last year's successful information stand at Seafood Russia, a Canada Booth was featured this year at the show from June 6-8, 2006 in Moscow.

This was the Third International Specialised Exhibition held in Moscow and included a specialised conference. The venue was shifted from last year to the Crocus Centre, a large, world-class exhibition facility on the ring road surrounding Moscow. There were 135 exhibitors (up 32% from 2005) with 23 foreign countries represented. Visitor traffic was up from the 2005 show although, as a specialized industry show, this is not a large traffic venue. Canadian exhibitors reported 66 trade leads received at the show, immediate on-site sales of $300,000 (a 30:1 ratio against the cost of the booth) and anticipated sales in the next 6-12 months of $2.9 million.

There was strong buyer interest in Pacific hake, mackerel, salmon, salmon caviar, capelin, and coldwater shrimp (head-on cooked and frozen), as well as individual enquiries for other products. There were many general enquiries for "frozen seafood" from firms interested in getting involved in seafood distribution in Russia.

Canadian exhibitors also met with the key seafood buyers for Metro Cash & Carry in Russia. MCC currently sells live lobster from Canada and is seeking other fresh and frozen products. MCC indicated they would provide the contact details of their key importers to enable Canadian seafood firms to discuss specific sales opportunities. Metro's business practices in Russia are the same as they are for western Europe in terms of programs for marketing, listing, market entrance, and advertising. Frozen cooked head-on coldwater shrimp is purchased through an internet auction while other products are purchased through supply negotiations. A suggestion was made by Metro that their logistics support firms could be invited to visit Canada to see seafood suppliers.

Seafood Russia served as a useful tool to further Canadian seafood export objectives in the growing Russian market.