Ukrainian retail chains in no rush to pull out of Crimea

Photo: Konstantin Melnitsky

Ukraine’s food retail business remains operational in Crimea. «So far, not a single Ukrainian player on the retail market has left the peninsula,» says Director of the GT Partners Ukraine research company Ihor Huhlya. At the moment, 100 chain supermarkets are operating in Crimea: ATB (60 stores), Silpo (10), Novus (8), Furshet (9) and chains of the Retail Group (Velyka Kishenya and Velmart — 2) and Auchan and EKO-Market (1 each).

Permission granted

The Ukrainian government did not prohibit businesses from operating in Crimea, explains Managing Partner of the Retainet consulting company Oleksandr Lanetskiy. The strategy of retailers’ operation on the peninsula was divided. The whole problems lies in taxation: if you register a legal entity in Crimea taxes must be paid to Crimean and Russian budgets. If a company remains a Ukrainian legal entity then taxes must be paid to the national budget of Ukraine. «Concrete rules have not been set as the process is in the transitional phase. Taxes are paid as agreed upon,» a retailer operating on the peninsula confirmed on condition of anonymity. As a reminder, a transitional phase that gives Ukrainian companies the possibility to re-register their legal entity according to Russian law is in effect until January 1, 2015.

Certain players, for example Auchan and Novus, decided to take advantage of this opportunity. The ATB chain is also considering taking this step. Be that as it may, many chains are taking a wait-and-see approach. «So far it is not totally clear what happens after January 1. For this reason, we are in no rush,» says co-owner of the Furshet chain of supermarkets Ihor Balenko.

At the moment the authorities in Crimea not recognized by official Kyiv are discussing the possibility of giving the companies registered according to Ukrainian law the status of foreign companies operating on the territory of Russia. The issue of taxation for such companies is currently being discussed.

Consumers will pay

The operations of retailers in Crimea are irregular. As Capital wrote earlier, at the end of September President of Ukraine Petro Poroshenko signed the law on creating a free economic zone in Crimea and Sevastopol in which mechanisms of working with Crimean enterprises were factored in. For example, in order to bring products onto the peninsula suppliers will have to show an agreement, an invoice, a waybill and certificates for products, including radiology equipment that earlier were not required at the customs border. Initially, there were long lines for processing such documents, but eventually the situation stabilized. Periodically, as Director of the Magistral trading company (distributor of Danone dairy products) Oleksandr Mykhailov told Capital, there are problems on the Crimean customs border.

Certain customs officers may demand additional documents. Due to this retailers began buying most products from local producers and part of them they continue to import from the mainland. «We buy around 90% of our goods on the peninsula and the remaining 10% we bring in from the mainland,» said Balenko.

However, domestic production cannot always satisfy the demands of retail chains. The most problematic goods are dairy products, eggs and meat. Russian grocery goods are more expensive. Moreover, the unstable operation of the Kerch ferry crossing due to inclement weather conditions complicates the delivery of products.

In order to avoid an acute shortage of grocery goods at the beginning of November Rosselkhoznadzor (Russian Agricultural Monitoring Bureau) lifted the ban on the delivery of Ukrainian products to the territory of Crimea until January 1, 2015, Deputy Chairman of the Board of Rosselkhoznadzor in Crimea and Sevastopol Yuriy Yepanov said live on the air of the radio station Voice of Russia.

Nevertheless, all products that Ukraine delivers to Crimea are inspected by Rosselkhoznadzor at the border for compliance with Russian quality standards. After that, all products, especially dairy and meat products, are inspected a second time at the point of delivery.

Retailers factor into their prices all the risks associated with the delivery of products to Crimea. «While in Ukraine the average mark-up of a retailer is 20-25%, in Crimea this figure is 40%,» said the director of a distribution company that delivers food products to Crimea. The prices of food products on the peninsula are on average 30% higher than in Ukraine, Balenko confirms.

A bright future

In April, after the annexation of Crimea by Russia, retailers told Capital that they hoped to sell their Crimean assets to Russian players on the market. The problem is that the Crimean market is not attractive for the majority of Russian retail chains, Director of the Russian investment company Prosperity Capital Management Aleksei Krivoshapko believes. «Business sees the risks associated with the undefined legal status of the peninsula and logistics problems. Vehicles transporting food products are often stuck on the ferry crossing for hours,» he explains.

Director of the Russian company INFOLine-Analysis Mikhail Burmistrov noted that in Crimea all legislative problems have not been resolved to this day. «For example, there are problems with the registration of real estate,» he added.

As Capital wrote earlier, major retailers such as Magnit or the X5 Retail Group (Perekryostok, Pyaterochka) are weary about entering the Crimean market. Such a move could lead to a drop in the value of stocks of these retail chains that trade on foreign stock exchanges. As a reminder, from the moment that Crimea was annexed in March of this year only one Russian retail chain Assorti-produkt entered the local market having opened in Simferopol six points of sale operating in the «store at home» format.