Illegal Russian sugar production causing price crisis

Related tags Sugar Russia

Illegal production of refined sugar in Russia has had a devastating
impact on prices there, with 'underground' producers able to
undercut official processors by a substantial margin through the
use of much lower quality sugar. Angela Drujinina reports.

Russia has strict standards for the processing of both granulated and refined sugar, set out in the official standards GOST 21 and GOST 22 respectively. Refined sugar, which is used to make pressed sugar cubes, clearly costs more to produce (since its base product is the standard granulated sugar) and as such sells for a substantially higher price.

Back in December 2003, that differential was as high as 102 per cent, but by August it had plummeted to just 42 per cent as a result of a sharp rise in the illegal production of pressed sugar products using non-refined (and therefore much cheaper) sugar.

Denis Belikov, head of sales at sugar processor Russkaya Sakharnay Kompania JSC told​: "The problem is that uncertified manufacturers simply take GOST 21 granulated sugar, dissolve it in water and then mould small cubes out of it, pack them and sell them. This simple unpurified sugar looks like refined GOST 22 sugar, but the cost of production is much lower."He continued: "The profits are easy to calculate: 1 kg of granulated sugar is worth RUR14 at retail prices, but the pressed sugar costs a minimum of RUR20. The illegal manufacturers spend no more than RUR1.5 per kilo."​With these illegal products retailing for far less than those produced according to the official GOST standards, traditional sugar refiners in Moscow and Tula - already under price pressure from the arrival in November 2003 of a major new player, Rusagro, whose Chaikofsky brand has proved an immediate success - have taken a further hit, and most have drastically cut back production.

Evgeny Ivanov, an analyst at the Institute for Agricultural Market Studies (IKAR) in Russia, told "A year ago, the legal production of pressed sugar in Russia was about 70,000 tons. This year, it is down to 30,000 tons that we know of from the statistics. But Russian consumers eat more than 200,000 tons of sugar cubes a year, with the additional production coming from 'underground' producers.

"Moreover, according to our data, these illegal producers operate in every town with population of 200,000 or more, and in big cities there are dozens of them."​He continued: "A man can buy a production line for $20,000, install it in a basement of some building and hire two or three illegal workers, let's say from Tajikistan. The pure profit at the end is about 100 dollars per ton. And without any intervention from the state authorities, the situation is not likely to change for the better."

But with consumers' health was at risk from unregulated sugar processing, action is clearly needed. "The producers that do not meet simple sanitary standards must be closed down,"​ he said, although he also suggested that those 'underground' producers making better quality pressed products should be encouraged to take a further step and 'go legitimate'.

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