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By John Helmer in Moscow

Despite sinking Russian consumer incomes, the banana is holding firm, enabling the St. Petersburg-based Joint Fruit Company (JFC), to increase its share of sales at the expense of its domestic rivals. With turnover of $500 million in 2007 (the latest figure JFC has released), JFC says there has been no slipping of growth in demand and sales of bananas this year, and its Bonanza! brand is expected to turn the crisis conditions to its advantage.

Russians don’t eat as much fruit as they should, but the first fruit to break through when the Iron Curtain came down was the banana. With average annual consumption of fruit at just 53 kilograms for Russians — half the US consumer level – this year’s loss of real income (in May this was down 20%, compared to the year before) has pushed Russians into cutting their fruit imports, but eating more bananas.

The reduction in fruit imports to Russia has amounted to 6% so far this year, according to a report by maritime analyst Alexei Bezborodov. The cutback is less than the 41% reduction in imports as a whole, but it marks a sharp reversal in the fruit segment of the refrigerated container (reefer) trade, which has been feeding 12% annual growth in fruit consumption. This year, according to a market analyst in St. Petersburg, the Russian fruit market will shrink by 5% overall.

Most fruit enters the country through St. Petersburg port, which reported 650,000 tonnes of reefer cargo processed in the first quarter; that was down 37%, compared to 2008. Bezborodov reports that the trade in bananas will be least affected in this downturn, because Russian consumers are substituting cheaper fruit for more expensive citrus, apples, pears and grapes from South America and Africa. Roughly one banana in four currently imported to St. Petersburg is produced on a Russian-owned plantation in South or Central America – principally Ecuador and Costa Rica. Because their price is relatively stable, while Russian food prices are growing overall by about 1% per month — domestic cucumbers and tomatoes are now costlier than imported bananas — the banana trade is expected to grow as winter approaches.

The switch to bananas has seen consumption rise by 24% in the six months to June, according to a St. Petersburg fruit trade survey. JFC, which led the banana importers in 2008 with 220,000 tonnes, is picking up volumes from the now bankrupt Sunway group. Financially, JFC – which is registered in the British Virgin Islands – would be doing much better if it had not invested its fruit trade profits in speculatively priced commercial real estate projects in the two years before the crash. That in turn triggered a ratings downgrade for its bond and loan obligations from Standard & Poors, who warned in February 2008 that the real estate investment was bound to be more slippery than the proverbial banana skin.

By August of 2008, Standard & Poors said the company had retrieved its financial position somewhat. The ratings agency then changed its mind again, warning in December 2008 that JFC’s “opportunistic financial policy” had caused a “deteriorating liquidity position. The company faces a possible covenant breach on its three-year $150 million syndicated loan, for which it does not have enough back-up liquidity sources to satisfy requests for repayment by creditors. JFC has already breached covenants on the syndicated loan, but managed to negotiate a waiver from syndicate arrangers. The company nevertheless had minimal headroom under one of its covenants for the 12 months ended Sept. 30, 2008. Additional waivers are likely to increase JFC’s cost of funding and make interest payments increasingly difficult for the company.

“The negative outlook reflects JFC’s risks of noncompliance with covenants under its syndicated loan facility, which might trigger a default if the company obtains no waiver or if covenant breach is followed by a distressed exchange offer. We factor into the ratings JFC’s immature corporate governance and risk management, and limited transparency and visibility.” The last line is a reference to JFC’s owner, Vladimir Kekhman (pictured), who also funds and runs the Mikhailovsky (aka Maly) opera and ballet theatres in St. Petersburg.

Kekhman may have slipped, but the banana remains firm. Roughly one Russian banana import in four is grown by JFC and other Russian importers on their own plantations in Ecuador or Costa Rica. They also charter their own reefer fleets into St. Petersburg.

The price factor has also meant that in today’s Russian fruit market, apples are also holding up because of low-price supplies from neighbouring Poland. The biggest losers in these conditions are the South African and South American shippers of high-priced grapes, pears, and citrus. According to a JFC marketing source, “Russians on the whole have acquired a habit of healthy consumption and try not to refuse it completely. But monetary difficulties force them to choose cheaper fruit. Thus, the middle-term forecast of consumption completely depends on the situation of the Russian economy. If growth does not revive, we will finish the year with the market volume at a level below last year’s, and with an expanded share of inexpensive fruit. In the event of economic growth, we will see a return to consumption of expensive European and Latin American apples and pears, and good sales of citrus.

A similar trend is visible in Russian consumption of vegetables. Because of price, consumers are switching to onions, cabbages, and potatoes, and cutting down on peppers.

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