Sri Lanka Plans to Package Tea at New Plants in Russia

Sri Lanka’s tea industry is planning to set up packaging plants in Russia following Russia’s doubling of import duties on packaged tea two months ago and to reduce its exposure to corruption and theft.

The MJF Group, the largest exporter of Sri Lankan packaged tea to Russia, said it intends to set up a plant there in the next six to eight months. Both Bogawantalawa Plantations Ltd. and John Keells Holdings Ltd. say they may follow suit.

They are concerned that the Russian duty increase to 20% from 10% and the construction by Russia’s May Tea company of the largest tea packaging plant in the world might threaten the growth in their share of the market in the former Soviet Union, the world’s largest tea importer.

Sri Lanka’s exports to the former Soviet republics rose to 46.6 million kilograms last year from 4.2 million in 1992, as the Georgian tea industry collapsed in the face of competition from imports.

The companies say they are concerned about corrupt customs officials, poor infrastructure at some Russian ports and theft by bandits.

“Moving cargo in and out of Russia is a nightmare,” said Dilhan Fernando, marketing director at MJF, citing customs corruption, port delays in winter because of a shortage of ice breakers and theft by Russian gangsters. “We want to establish a packaging presence there and see how it works out.”

He said many importers avoid the higher duties because Russian customs officials aren’t enforcing them and there is under-invoicing.

Still, within a year Fernando said he expects the duties to be fully charged. “The duties will become a more important factor,” he said.

He said he is less concerned by the plan by May Tea, which used to be MJF’s distributor in Russia, to set up a plant in the Moscow region processing 40,000 tons of tea a year. “The domestic industry is in a shambles,” he said.

May Tea spokesman Vladimir Perekrest said that production would begin at the end of this year, although he declined to specify at what rate and how quickly full capacity would be reached.

He said the duties on packaged tea imports “contradict the norm of international trade,” given that Russia doesn’t produce tea and it is regarded as a key product for consumers. May pays a 5% duty for the raw tea it will package.