Imports of Holsten, one of the leading German beers, are destined to go down in Russia – but that's just what the brewer has in mind.

It's not that Holsten—Brauerei AG is giving up on Russia. On the contrary, the German company has signed a five-year deal with the Russian branch of South African Breweries (SAB) to produce the beer in Russia, specifically at SAB's Kaluga Brewery.

Company officials said that by brewing Holsten domestically, the price for consumers will be reduced by more than 75 percent which, it hopes, will lead to increased sales.

Russia will become the fifth country – after Poland, Hungary, Nigeria and China – to host a licensed Holsten production facility. By the end of this year, plans call for producing 8 million liters of Holsten beer in Russia.

"I would say the target of 8 million liters represents our cautious optimism," Holsten-Brauerei board member Eckhard Koll said. "I also believe that five years will be enough for us to get to know each other and develop our cooperation. Russia's market is very important for our company."

Holsten—Brauerei conceived plans to organize beer production in Russia shortly after the August 1998 crisis, as sales of imported beer fell more than 90 percent here. German-made Holsten beer normally sells for about $1 per 0.33-liter can, some three times the average price of Russian-made beers. At this point, SAB and Holsten estimate the sale price of Russian-made Holsten would be 17 rubles per 0.33-liter can.

"The manufacturer's share in the price is 50 to 60 percent; 10 to 15 percent goes to distributors and the remaining 30 to 35 percent to retailers," SAB Marketing Director Konstantin Samoilov said. "A big problem is that retailers are prone to place elevated markups on foreign brands. We are afraid they would charge 50 to 60 percent markups on our beer even though it is Russian-made."

As things stand, foreign beer brands – both imported and domestically produced – constitute only some 5 percent of Russia's beer market, but representatives of SAB believe the share of foreign brands will increase with the launch of Holsten production.

Holsten beer will be produced in Russia exclusively from imported components such as malt, hops and yeast. A representative of Holsten said this is the only possible way to ensure production of genuine Holsten beer. Many Russian breweries also use imported components.

Holsten appeared on Russia's market at the beginning of liberal reforms, in 1990, and the German company has spent DM20 million on brand promotion since then. Now it plans to launch an advertising campaign for Kaluga-made Holsten, first of all on television.

While the budget has not been disclosed, Russia's BBCO advertising agency has won the tender to produce the ad campaign. A TV commercial has been made, drawing on the old German legend of Faust and Mephistopheles.

South African Breweries, SAB, is famous in Russia for effectively promoting its Zolotaya Bochka (Golden Barrel) beer, now one of the country's most popular beers. SAB launched its Russian business in 1998 and runs two companies here – Kaluga Brewery and Transmark, a marketing, sales and administration outlet.

SAB took the Kaluga Brewery and spent some $100 million on German equipment with the capacity to produce 50 million liters of beer annually. Production of Zolotaya Bochka got under way in May 1999 and, within two months, the brewery's workload was up to 100 percent capacity. Despite its relatively high price of 14 rubles per 0.5-liter bottle, within one year, Zolotaya Bochka became Russia's No.2 beer, second only to Baltika.

Holsten will become the second beer brand to be produced by SAB under license – in November 1999, the Russian Kaluga Brewery launched production of Czech beer Staropramen, which required a production extension and a $20 million investment.

"By late May, we plan to complete an extension and modernization project that will increase the brewery's capacity three times," SAB's Russia Director Alan Richards said.