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On the rocks -- and on the rise
On the rocks -- and on the rise
Oleg Trutnev

MOSCOW - Legal vodka production in Russia was down nearly 40% in June from the same month last year. Could this mean that Russians are suddenly less devoted to this nationally beloved libation? Do they have fewer sorrows to drown? Unlikely. Instead, tax hikes on alcohol have made it more difficult for legal producers to compete with bootleggers, who already control an estimated 30% of the vodka market.

This is hardly unexpected. Since last year, experts have been warning that legal vodka production would slow down, following a 57% tax increase on hard liquor effective at the beginning of 2013. The tax on one liter of vodka used to be 254 rubles ($7.84), but with the new rate, taxes on the same bottle are now 400 rubles ($12.34).

The results of the new levy are dramatic. In just six months, vodka production fell 28%. Experts say if you compare June 2012 to June 2013, the drop is even sharper because the industry was ramping up production last June in preparation for the tax increase at the beginning of the new year. Comparing June 2013 to the same month in 2011 makes the industry slowdown seem less serious — just an 11% decrease.

But those numbers only tell part of the story. “Over the first half of this year, the sales of bootleg vodka in this country have taken on massive proportions,” says Vadim Drobiz, director of the Federal and Regional Alcohol Market Research Center. “Illegal vodka is being sold everywhere.”

Half a year ago, experts thought that legal vodka sales would drop by 10 to 15%, but now they are feeling less optimistic. “I will be happy if that number is 20% and not more,” says Andrei Strelets, owner of one vodka company. What's worse still is that taxes are set to increase again by 25% at the beginning of 2014, to 500 rubles ($15.4) per liter.

“We are already seeing major reductions in the legal market,” says Dmitrii Dobrov, representative of a major vodka production company. “But next year, when the taxes go up again... it’s scary just to think about it.”

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